2016 has been an eventful year in the currency markets, but it’s not quite over yet with three central bank meetings scheduled over the next couple of weeks. The European Central Bank, the US Federal Reserve and the Bank of England will all be meeting to review their monetary policy. It is possible that the outcome of these meetings could have an impact on currency markets around the world, particularly if there are any surprise announcements.
We’ve taken a look at what is expected to happen in each of these meetings and what this could mean for the Pound, the Euro and the Dollar.
European Central Bank: 8th December
There appear to have been some market nerves around the Euro in anticipation of this meeting, as it slipped from three-week highs against the Dollar on Tuesday.
The volatility in the Euro is linked to the European Central Bank being widely expected to extend its controversial quantitative easing programme beyond its current end date of March 2017, by at least another six months. The governing council may feel this is necessary due to the continued weak inflation rate. Uncertainty created by the result of Italy’s referendum at the weekend could also strengthen the argument for increased bond buying, with the European Central Bank having pledged to buy Italian government debt if necessary.
But it is not a method favoured by the currency markets, as we saw when the Bank of England announced similar plans back in August. As a result, we might see the Euro weakening against the Pound and the Dollar. However, if the European Central Bank announces a tapering programme to reduce the amount of bonds they purchase each month, then that could help to reduce this concern.
US Federal Reserve: 13th to 14th December
This time last year, the Federal Reserve raised interest rates for the first time in nearly a decade. There has been constant speculation throughout the year about when the next increase will be, and it now seems very likely that they will choose to do so in their meeting next week.
There are a number of reasons why they might choose to do this. Economic figures in the US have generally been quite positive recently, with a reduction in unemployment, increase in wages and stronger figures from both the manufacturing and service sectors. GDP growth in the third quarter was the fastest pace in two years and consumer confidence is high. It is also expected that Trump might provide a further boost to the economy from tax cuts and infrastructure spending.
As a result, the Dollar appears to be in a strong position at the moment and an increase in interest rates could make it more attractive to international investors. There are however some questions around what the Federal Reserve’s long term strategy will be, which may not be answered until they have had some time to review and assess Donald Trump’s policies after he comes into power next year.
Bank of England: 15th December
It’s been a tough year for the Bank of England, as they have been adjusting their policies to manage potential risks as a result of the Brexit vote. Some have criticised their decision to cut rates and inject more money into the financial system following the vote. However, Governor Mark Carney has defended their policy of low interest rates, claiming this has helped to reduce unemployment and prevent a drop in wages during an uncertain time.
The Bank of England’s position now is slightly less clear than for the European Central Bank and the Federal Reserve. Shortly after the Brexit vote, there were some expectations that interest rates might be cut again in December, due to fears that the economy would slow down or even go into reverse. But since then, economic data has mostly been more positive than expected, with growth remaining at around 2% while inflation has risen quickly as a result of Sterling’s fall. This has led some to question whether rates should actually be increased.
Bank of England chief economist Andy Haldane has however warned against increasing interest rates to curb inflation. He feels that “monetary policy is ill-equipped for the task of either expanding the economic pie or altering the way it is sliced”.
It seems possible that the Bank of England may decide not to take any action at this time, preferring to wait and see what happens next – particularly as we approach Theresa May’s deadline in March for triggering Article 50. As a result, the Bank of England meeting seems unlikely to have a significant impact on the Pound.
Instead, markets are likely to be more focused on the verdict of the current Supreme Court legal challenge around whether MPs will have a vote on Brexit, which is due in early January.
What does this mean for my money?
These events could increase currency volatility over the next couple of weeks, particularly if any of the central banks make a surprise announcement.
If you need to make an international money transfer in the next couple of weeks, this could provide you with an opportunity to make your money go a bit further. You may wish to consider setting up a rate alert, which will let you know as soon as your desired exchange rate becomes available, so you don’t have to keep watching the markets. You can set up as rate alerts if you have a HiFX account.
Or if you would like to discuss your situation with us in more detail, please contact us.
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