October was a relatively strong month for Sterling with pretty hawkish comments coming from the Bank of England over the month giving markets an opportunity to begin pricing in interest rate hikes before 2022- and more next year. We have seen GBPEUR rise from 1.15 to 1.19 through this and GBPUSD rise from 1.34-1.38. These moves are always nice, but we have to be aware that it is speculation-driven- and nothing has actually happened yet- but this week is when we should begin to see some fireworks (Ironically same week as November 5th!)

So let’s begin with BoE this Thursday- right now it seems markets are pricing in a hike on interest rates, but for the sake of creating a balanced view, we need to look at the reality of this scenario. Inflation is rising, so logically raising rates makes sense- but as it stands my gut feeling is maybe we don’t see this action in November- and if we do, maybe we do not see as many as markets are looking at in 2022.

My reasoning is that if we DO see a hike this week, it is unlikely to be a unanimous one. There are at least 3 members that are likely to be against a rate hike happening this month, with another 1-2 who are likely to vote in this camp. I am then envisioning at least 3 likely to vote FOR the hike, with a couple swing voters as well who could go either way. The reason why I am doubtful of aggressive rate hikes is though we need them raised to combat inflation, wages are not flying up either, which could present our economy with a big problem in 12 months.

The second issue is that the Government in the UK is toying with the idea of bringing back masks and suggesting people should work from home, this is due to rising Covid cases- if this is really on the cards, raising rates just yet does not make sense as consumer confidence may be lower if they feel they are at risk of being infected if they leave the house.

So what are the likely scenarios here? If rates go up, I think it will be small, maybe 15 bps, and I would expect GBP to move higher, if we don’t see any hikes, then I expect GBP to be a little softer, with the assumption that a hike will come in December. However, the most important thing here is the tone of the BoE on Thursday, what are the forecasts, where do they see the economy going, this will either back the underlying strength in GBP or sweep away the rug- so I do urge nimbleness this week as it could be a very volatile Thursday!

Now, on Thursday night we have the Fed interest rate decision. No rate hikes are expected but the main topic of this meeting is TAPERING. Fed Chair Jerome Powell said he was going to try and taper in November at the September meeting, but since then many GDP reports have been pretty bad, the only positive is the rising wages released last week which does help the rising inflation case. But generally, I think the Fed would be tapering into weakness, not support- which would be pretty rare if it does happen- I am not 100% convinced they go through with it.

However, if they do, there are two circumstances I am looking it- the first is a “True Taper”, which would mean no standing repo or swap lines. And secondly, a “Fake taper” would mean using standing repo and swap lines to fool the bond market and still print money, but in another way. If they do a real taper, I think the equity market would get crushed, and we see USD take a lot of strength from the move, which will create a short risk-off period where likely all assets get hit and would be a major policy error that the Fed would need to back track. Eventually, QE would be increased again in a big way.

If they decide to go for the “Fake Taper” I think markets should be fine as the Fed will still be providing liquidity to still help the market, which they need to do to keep debt/GDP lower.