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Biggest announcement of the year for all financial markets

Biggest announcement of the year for all financial markets

9.30 am this morning the Bank of England MPC minutes will be released, showing how the members voted at the last MPC meeting. The markets are expecting to see that members voted unanimously to keep rates on hold with no changes in the QE program. Any data to the contrary or a significant change in rhetoric could impact GBP.

Despite the significance of the BoE minutes the market will be positioning/bracing itself for the Federal Reserves monthly announcement on interest rates and asset purchasing program (QE).

There is next to no chance of interests rates in the US being altered BUT markets are expecting a change in the asset purchasing program, in particular they are looking for the Fed to start reducing the amount of money it is putting into the economy (via bond purchases), in other words ‘tapering’.

Why is this so significant?

It’s simple supply and demand, tapering effectively reduces the supply of USD, and when supply is reduced this drives up price. In addition to this consider that between 40 and 60 percent of global transactions are denominated in USD, 60+ percent of global currency reserves are in USD and many currencies are pegged to the dollar, you start to see why changing the amount of USD in circulation can have such an impact.

What will happen?

This decision has been speculated upon for months now, indeed the market started to price in their expectations way back in March. Expectation have veered from a significant reduction of 20 billion+ to the decision being postponed entirely. Based on current market expectations the following could be expected:

  • Decision postponed/No tapering announced  – USD will weaken quickly

  • 7-10 Billion tapering announced – muted reaction but USD will strengthen a fraction

  • 10 Billion plus – USD will strengthen across the board

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