• Careers FAQs Client login
Going it alone: central banks and the dawning of divergenceGoing it alone: central banks and the dawning of divergenceGoing it alone: central banks and the dawning of divergenceGoing it alone: central banks and the dawning of divergence
  • Home
  • Services
    • Foreign Currency Risk Management
    • Interest Rate Risk Management
    • Fund Finance Services
    • Investment Products
  • Industries
  • Our Technology
  • About
    • Who we are
    • Culture
    • Careers
  • Our Team
  • News & Insights
CONTACT US
✕
            No results See all results
            What’s next for the Fed? Look to the 1980s.
            8 November 2022
            Is the US Dollar still Royal?
            16 November 2022
            14 November 2022
            Categories
            • Insights
            Tags
            FX INSIGHT • 14 NOVEMBER 2022

            Going it alone: central banks and the dawning of divergence

            Jesus CB

            Jesus Cabra Guisasola, Global Capital Markets Senior Associate


            Since the beginning of 2022, we have witnessed some of the most aggressive and synchronized monetary policy tightening in decades on the back of the conflict in Ukraine, which has pushed inflation to historical levels. However, the three major central banks are now signalling the start of a new phase with clear divergences among them, partly reflecting growing disparities in economies that are still struggling in the aftermath of the pandemic and exacerbated by geopolitical conflicts and political uncertainties.

            Starting with the Bank of England, the old lady delivered in line with market expectations and decided to hike 75bps. However, the decision was interpreted as more dovish than expected, with the vote split with two members supporting smaller hikes and the Monetary Policy Committee pushing back on market expectations around the path of further hikes.

            Moreover, the BoE used its growth forecasts in an effort to cool demand by downgrading its expectations and increasing unemployment projections, with Governor Bailey signalling that the British economy will fall into the longest recession on record.

            Some market commentators saw this “pivot” coming, as it was suggested that the central bank, having some foresight of the upcoming budget, was adjusting policy to accommodate the incoming fiscal restraint.

            In Europe, the Governing Council decided to double the main rate to 1.5%, the highest level in over a decade. Although a 75bps hike in interest rates would have been taken as an aggressive measure by most investors a year ago, the decision came as more dovish than expected, with Lagarde highlighting the higher probability of recession and the lagged impact of rapid monetary policy tightening in her press conference.

            On the other side of the pond, the Fed’s decision last week was the most anticipated among all major banks. Reports from the Wall Street Journal weeks before the meeting underlined plans for the Fed to signal smaller increases in rates from December’s meeting.

            Upon the release of the statement, market participants took the WSJ reports as accurate, given it contained some dovish language from the Committee where members were considering the cumulative tightening, and its lag effect on the real economy.

            This pivotal moment was short-lived, as Powell swiftly corrected any interpretation that suggested the Fed is pausing its monetary policy tightening, saying that it was “very premature” to think about pausing. Moreover, the Chair contextualized the new statement language by highlighting that during the hiking cycle, three important components need to be considered: the pace, the peak of terminal rate and the length of a restrictive monetary policy.

            What’s next?

            The recent divergence in the rhetoric of the central banks has helped push the US Dollar higher, adding to already incredible performance of the greenback over the last year. Should the policies continue to diverge, we could see the US Dollar push on further.

            That said, the US Dollar has been trying to trade lower for the last few weeks, with yesterday’s CPI numbers showing that market participants are desperate for good news to bet against the greenback. Moreover, recent economic data from the US around labour and housing markets are showing clear signs of deterioration. This, coupled with the results from the mid-term election, which could mean a more restrictive fiscal policy if Republicans retake control of the House, could be enough of an argument for the Fed to ease its tightening cycle and for the US Dollar to reverse.

            Be the first to know

            Subscribe to our newsletter to receive exclusive Validus Insights and industry updates.

              Share

              Related posts

              2 October 2023

              Central Bank Meetings and Stubborn Curve Inversion


              Read more
              27 September 2023

              Is the Market Finally Seeing the Hawks Circling Overhead?


              Read more
              20 September 2023

              Growth or Inflation – The Central Banks’ Dilemma


              Read more
              Validus-white-logo
              Services

              Foreign Currency Risk Management

              Interest Rate Risk Management

              Fund Financy Advisory

              Investment Products

              Industries

              Private Capital

              Pensions Funds

              Corporates

              Our Technology

              RiskView

              TradeView

              PortfolioView

              London

              24 Torrington Place, 3rd Floor
              London WC1E 7HJ
              T. +44 (0) 203 923 8575

              Eton, UK

              119-120 High Street
              Eton, SL4 6AN
              T. +44 (0) 175 338 6548

              Toronto, Canada

              10 King Street East, Suite 800
              Toronto, Ontario M5C 1C3
              T. +(1) 416 646 0590

              New York, United States

              222 Broadway, 19th Floor
              New York, NY 10038
              T. + 1 929-219-3793

              T&Cs | Privacy Policy | Regulatory

              Copyright 2022. All rights reserved. Validus Risk Management Limited is authorised and regulated by the Financial Conduct Authority (firm reference 555972), is licensed by the CFTC and is a member of the NFA (ID 0504990). Validus Risk Management Limited is incorporated in England and Wales (registration number 07140753), with its registered office at 119-120 High Street, Eton, Windsor, Berkshire, SL4 6AN, United Kingdom.

              CONTACT US
                        No results See all results