FOMC Meeting and Eur-Usd
27 January 2022
Trading idea from a ratio
12 February 2022
During this period I have very little time to devote to the site, to analysis and to writing articles, and I am very sorry about this. Today, I am availing myself of the precious collaboration of Hannah who, at my request, and I thank her infinitely, has produced a superb analysis of Eur-Gbp to which I have only added a few of my own impressions.
Last week, more precisely on Thursday 3 February, the two central bank meetings, the Bank of England and the European Central Bank took place. At a time like this, with the pandemic that is, alas, ever-present in our lives, inflation rising steadily, these were not two meetings like any other.
I want to start with this one, which is usually the end of my analyses, as anyone who has read my book knows. So let's see what emerged from the two meetings, starting with the Bank of England.
BoE meeting of 3 February 2022.
What was striking was not the 25 basis points rate hike to 0.50% that was widely expected, but the split vote on a larger hike, with 4 members (out of 9) voting in favour of a 50 basis points increase.
The BoE suggests that further hikes may be needed, so money markets are now looking at a possible increase of another 25 basis points at each of the next four meetings. While the decision itself was "hawkish", Governor Bailey hinted at a "dovish" side, in which the message seemed to be hikes now but will stop and reassess.
This is what emerged from Governor Bailey's press conference:
- Should not assume rates are on a long march upwards.
- We have not raised rates because the economy is roaring away, this is not a standard demand driven rise in the Bank rate.
- We are facing a squeeze on real income this year.
- Would not be surprising if we see a further rate hike, but please do not get carried away.
- Bailey significantly reduced his economic forecasts, saying that UK economic growth would soon “slow to a reduced rate” of around just 1 per cent a year.
There is therefore a possibility that the BoE could start cutting interest rates again in 2023 when it is faced with low economic growth.
Ultimately, in the UK we are faced with high inflation (forecast by the BoE at 7.25% in April) combined with a weak economy confirming stagflation. In fact, the increase had no effect with the pound retracing on Friday 4 February, losing all the gains of the previous day.
ECB meeting on 3 February 2022.
ECB President Lagarde held her more hawkish than expected press conference admitting that Eurozone inflation had peaked at 5.1%, which surprised and caused great concern in the Governing Council.
Although the ECB has left policy unchanged, Lagarde's words have been widely interpreted as signs of a likely move to tighten monetary policy as early as March, with Lagarde refusing to rule out tightening of monetary policy in 2022
Markets now expect the deposit rate to rise from -0.5% to -0.1% by December.
Ultimately, Christine Lagarde in her press conference opened the door to a speeding up of asset purchase reductions and a rate hike this year. This pushed the euro strongly up against all other currencies.
After seeing what the two meetings left us with, I will show you graphically what happened on the 15-minute chart of Eur-Gbp.
I will now look a little closer at inflation which is a source of concern not only for the BoE and the ECB.
The annual inflation rate in the euro area rose to a new record high of 5.1% in January from 5% in December 2021, while markets had expected it to slow to 4.4%. Energy continued to record the largest price increase (28.6%), followed by food, alcohol and tobacco. Core inflation, however, which excludes energy, food, alcohol and tobacco prices, decreased compared to December and November to 2.3%.
The inflation rate remains well above the ECB's target of 2%, with on the one hand an energy crisis in Europe that has sent the cost of natural gas, coal and electricity soaring and on the other hand, improving demand and weak supply related to the pandemic continuing to push commodity prices higher.
The UK annual inflation rate increased to 5.4% in December 2021 from 5.1% in November and above market forecasts of 5.2%. This is the highest reading since March 1992.
The largest contributors to the increase came from the cost of food and non-alcoholic drinks (4.2%), restaurants and hotels (6%), furniture and household goods (7.3%) and clothing and footwear (4.2%).
What can be seen is that the two inflations, Eurozone and UK, are generated differently. While in the Eurozone it is the energy sector that mainly contributes to the inflation growth, in the UK the increase is more homogeneous, spread over several industries.
This can be clearly seen by comparing the Core CPI figure on a graph.
You can visually see how the graph drops as evidence of the above. Data coming out in February should further increase this difference (but we will see that next week).
In conclusion, on the one hand, we have the Eurozone showing strength in growing its economy and at a faster pace than the UK (although I have not reported any data other than inflation in the analysis). Its job prospects are healthier than the UK despite the higher number of unemployed in the EU at 7% compared to the UK at 4.1% (it should not be forgotten however that the Eurozone's unemployment rate is the lowest it has been since the introduction of the euro). The UK is still suffering from workers shortages and supply disruption that are also part of labour market due to leaving the EU which prompted to the mass exodus of European workers who occupied these jobs.
Added to this is inflation with a difference between the Eurozone and UK that is set to widen in the coming months. The BoE has forecast a rate of 7.25% in April.
For all that, if there are no earthquakes to shake up the markets in the coming weeks/months, the euro will appreciate against the pound. In this regard, here is the chart below with the most significant levels.
After the great rise of Eur-Gbp on Thursday and Friday, a retracement up to 0.83900/0.84250 area is possible, which is an excellent level where to open bullish positions, with first target 0.85100 and next in the 0.85950/0.86300 area. The medium to long-term target is in the 0.92000 area.
I thank Hannah for the excellent analysis, in some ways better than I would have done. She is proving to be an excellent "pupil" and a precious collaborator.
Last week, more precisely on Thursday 3 February, the two central bank meetings, the Bank of England and the European Central Bank, took place. At a time like this, with the pandemic that is
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
