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Don’t central bank on it: Policy meetings could complicate your cash flow

business-articlesDon’t central bank on it: Policy meetings could complicate your cash flow
Monetary policy decisions are one of the biggest drivers of exchange rate movement. For businesses already at maximum capacity during the busy Christmas period, having to take into account extreme currency fluctuations in response to central bank decisions can be a strain.

To simplify the workload, we’ve got a quick recap of the latest Bank of England (BoE) interest rate hike, a list of the upcoming central bank decisions to watch out for, and some guidance on how December’s developments could affect your bottom line.

 

GBP tumbles on BoE rate hike after Sterling peaks early


As a result of the latest monetary policy meeting, ending 2nd November, the Bank of England (BoE) raised interest rates to 0.5% from an historic 323-year low of 0.25%.

Sterling tumbled after the announcement, meeting minutes and Inflation Report.

A stream of strong UK economic data and signs of confidence from members of the Monetary Policy Committee (MPC) in the weeks preceding the meeting saw markets pricing-in the prospect of higher borrowing costs well in advance.

This meant that pound exchange rates had already strengthened long before the BoE actually made its decision.

The contents of the Inflation Report and meeting minutes made profit-taking an appealing option, after suggesting that another interest rate hike would be some time away.

As a result GBP/EUR (after rising 2.7% since near the beginning of October) tumbled -2.2%. During the same period GBP/USD fluctuated more wildly, but still fell -1.9% on the day of the hike announcement.

 

Currency volatility forecast on December central bank decisions


There’s still plenty of central bank action left for December to keep the major currencies volatile.

The key monetary policy decisions left before the end of the year are:
  • 5th December: Reserve Bank of Australia (RBA)
  • 6th December: Bank of Canada (BOC)
  • 13th December: US Federal Reserve
  • 14th December: European Central Bank (ECB)
  • 14th December: Bank of England
As you can see, it’s set to be a busy final few weeks of 2017.

 

Forecasts for upcoming monetary policy meetings


The upcoming policy meetings may still be days, or weeks, away but investors have been eying them for some time now. Here are the general consensus opinions regarding what could happen at each of the key policy meetings during December.

 

Reserve Bank of Australia (5th December)


The Reserve Bank of Australia (RBA) said in its November meeting minutes that another adjustment to interest rates was not likely for some time, but that the next move would probably be a hike. Markets are therefore unlikely to be expecting tightening next month, but they will be looking for clues as to just how long they have to wait before borrowing costs are raised. More caution about the wage growth and inflation outlooks would be negative for the Australian dollar.

 

Bank of Canada (6th December)


The BOC has raised interest rates twice this year – a move which surprised markets given that Canada’s inflation rate hasn’t risen above 1.6% since February. Policymakers claimed that the weakness in price growth was temporary, so markets will want to see if they still believe this. If not, and if it’s implied that rates will remain static moving forward, the Canadian dollar could weaken markedly.

 

Federal Reserve (13th December)


Market odds of an interest rate hike from the Federal Open Market Committee (FOMC) on the 13th have been above 90% since the middle of October. The question markets want answered at this meeting therefore is not ‘Are rates going to rise?’ but ‘Are rates going to keep rising?’ Should the Fed indicate that there will be no more near-term hikes, USD could tumble as the latest change to interest rates is well priced-in.

 

European Central Bank (14th December)


In September the European Central Bank finally adjusted its quantitative easing programme, cutting the rate of monthly asset purchases in half to €30 billion. While a rate hike is firmly off the table, any noises on the future of quantitative easing could have a notable impact upon GBP/EUR exchange rates.

 

Bank of England (14th December)


As the Bank of England has said that it expects only two more interest rate hikes to be needed in the next three years, hopes aren’t high for monetary tightening this December. The pound may respond sharply if the MPC offers an outlook for the UK economy that drastically differs from current projections.

 

How will your business be affected by monetary policy meeting volatility?


Major currency exchange rates could see notable volatility in the wake of the end-of-year monetary policy meetings.

While the pound may rise once the Fed delivers its anticipated rate hike, unexpected signs of hawkishness from policymakers in Australia, the Eurozone or Canada could push GBP much lower.

A stronger pound benefits your business when it comes to paying overseas invoices, as it takes fewer pounds to meet cost obligations denominated in euros, US dollars, Australian dollars or Canadian dollars, while a weaker pound can increase the cost of imported goods and reduce your earnings from overseas sales.

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