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Sam Jones
November 3, 2021

Markets Expect US Federal Reserve (Fed) Policymakers To Announce Tapering

US Dollar remains well supported following higher (near-term) Global Inflation Pressures

Markets are anticipating that Fed policymakers will announce later that they will begin scaling back their asset-purchase programme in response to rising inflation. Last month, Fed Chair Jerome Powell said now is the time to begin tapering. Fed officials have commented that rate hikes are unlikely to be on the table until the bond-buying programme ends. The path of tapering is less clear however, until recently it had been expected that the Fed would initially reduce its bond-buying programme by $15 billion per month. However, more recently Fed policymakers have indicated they would favour a quicker rate of reduction. Other than guidance on tapering, we do not expect the Fed to be drawn on timing around interest rate hikes at today’s meeting. Several banks are currently pinning the first US rate hike in July next year, followed by another increase in November 2022.

Attention Turns To The Bank Of England (BoE) Interest Rate Decision For Policy Guidance

The BoE has started its two-day meeting today with the Monetary Policy Committee’s (MPC) official Bank vote due tomorrow. Markets are pricing in a 15-basis point (bp) rate hike at 62%, down from 82% in mid-October, bringing the base rate up from its lowest level from 0.1% to 0.25%. Perhaps of greater interest with this in mind will be any signals towards additional rate hikes in 2022. The fact that the BoE is hinting towards a rate hike tomorrow sends a clear signal to the market that they are serious about controlling the growing inflationary pressures, building expectations that the Central Bank will not hesitate to increase rates if required. As it stands, markets are currently pricing in a 65% chance that the base rate will exceed 1% by August 2022.

In terms of currency, Sterling was down against the US Dollar retreating to 3-week lows near 1.3600. It held around the 1.17 mark against the Euro, however.

Looking ahead to today, Andrew Bailey is due to speak this afternoon which will be closely watched ahead of the MPC vote tomorrow. We also have the final services Purchasing Managers Index (PMI) due this morning which is forecasted to show an unchanged reading of 58.0.

Euro Remains Unchanged As Focus Turns To The Fed and BoE Policy Guidance Update

Yesterday proved to be a relatively quiet day for the Euro. We did see the final October Eurozone Manufacturing PMI read slightly below expectations at 58.3, compared to 58.5 previously. Despite reading above the key 50.0 level which separates contraction with expansion, yesterday’s reading represents an 8-month low for the Eurozone Manufacturing PMI. Elsewhere, German and Spanish manufacturing PMI read below forecasts at 57.8 and 57.4 respectively. On the other hand, the Italian and French manufacturing PMI exceeded forecasts at 61.1 and 53.6 respectively.

Looking ahead to today, we have the European Central Bank (ECB) President Christine Lagarde speaking this afternoon. Elsewhere, changes to Spanish unemployment read below forecast at -07k.

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