The Bank of England is expected to keep its key interest rate and bond-buying program unchanged at its August meeting, but may move one step closer to tightening monetary policy amid signs that a dovish/hawkish split within the MPC is beginning to emerge.
Two policymakers said last month that the bank may withdraw monetary stimulus sooner than expected due to the strong economic recovery and jump in inflation, while most other BoE policy makers said the acceleration in price growth is likely to prove temporary. Nevertheless, policymakers have already said they will soon publish new guidance on how they can combine a rate hike with a reduction in bond purchases.
As a result, the Bank of England may be at the forefront of central banks preparing to tighten monetary policy. The RBNZ, or New Zealand's central bank, seems to be the first to do so, followed by the US Fed. According to San Francisco Federal Reserve chair Mary Daly, the Fed may begin tapering asset purchases later this year or in early 2022. "I'm looking at continued progress in the labor market, rising vaccination rates, things that are so fundamental to us that the economy has made significant further progress in these measures," Bloomberg quoted Daly's statement as saying.
What could this mean for the forex market? Well, the NZD, GBP or USD could emerge as the strongest currencies from among the world's major currencies from an interest rate market perspective. On the other hand, some of the weaker ones in this list could be EUR, CAD or AUD. For AUD, although the RBA confirmed tapering, it also stated that it will not raise rates until 2024. Hence, a divergence against theoretically stronger currencies may appear here, if the RBNZ, BoE or Fed "deliver" interest rate hikes within the time estimated by the market.
Today, the Bank of England's decision will be announced at 13:00, along with the Bank of England's quarterly inflation report and the BoE meeting minutes.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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