USD Uptrend Steady Before FOMC; GBP Risky Ahead Of BOE

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The US Dollar (via DXY Index) is holding ground for the fourth consecutive day, trading at 94.64 at the time this note was written, the same level it closed at after the ECB rate decision last Thursday. Even though the Federal Reserve will release its November rate decision and policy statement today, it doesn’t look like the US Dollar will be bothered one way or the other.

The Fed is one of these central banks that prefers to make major policy changes at meetings in which they have press conferences for their central bank head to soothsay market participants. The BOE (making changes at meetings with new Quarterly Inflation Reports) and the ECB (at meetings with new Staff Economic Projections) fall into this category as well: the ECB’s October taper was essentially pre-announced at their September policy meeting.

Chart 1: DXY Index Daily Timeframe (June to November 2017)

USD Uptrend Steady Before FOMC; GBP Risky Ahead of BOE

So today, with neither a new Summary of Economic Projections nor a Janet Yellen press conference, the Fed won’t do anything meaningful at all.

Instead, our attention should be on the widely-anticipated Bank of England rate hike tomorrow, which is pretty much set in stone. According to markets (overnight index swaps), there is an 89% implied probability of a hike. In support of this point of view, since mid-August, economic data trends have firmed up (the Citi Economic Surprise Index was -51.9 on August 15, today it is +5.7). The ‘big one’ that the BOE has everyone talking about is headline inflation, currently sitting at +3% y/y.

However, the inflation outlook going forward looks less severe. One of the main reasons for the spike in inflation was the base effect in the trade-weighted GBP brought on by Brexit. Now that the GBP is up y/y (it bottomed in early-October 2016 post-Brexit vote), BOE policy officials think headline inflation will begin to recede naturally.

I’m partial to think that the market is right here, given that I have no information to suggest otherwise. But on the rate hike scale, I’m on the ‘dovish end’: if the BOE hikes, it won’t be the beginning of a rate hike cycle.