Central banks deal cards on the currency market at the end of the week

22.09.2022 12:27|Conotoxia Ltd Analyst Team

The festival of central bank decisions continues. It was kicked off with Wednesday's Fed interest rate decision and the release of the latest FOMC projections. This was followed by a decision by the Bank of Japan, followed by a currency intervention. This coincided with the decision of the Bank of Switzerland and the Bank of Norway. The situation in the foreign exchange market now seems to be very dynamic.

Arranging everything chronologically, one would start with the Fed decision, where it was once again decided to raise the range for the federal funds rate by 75 bps, to 3.00-3.25%. Along with the decision, the FOMC's macroeconomic projections were also published. Committee members indicate the possibility of a peak in interest rate hikes in 2023. The peak could fall in the region of 4.5-4.75 percent. Such high-interest rates are expected to skillfully suppress inflation, but could also, on occasion, affect the slowdown in the economy and the unemployment rate. Jerome Powell said yesterday that lower growth and higher unemployment is still an overall lowered price to pay for slowing inflation than it would be if it got out of control. According to the Fed, in 2022. GDP is expected to grow by only 0.2 percent, and by 1.7 percent in 2023. Inflation is expected to be 5.4 and 2.8 percent in those years, respectively, and unemployment is expected to rise from 3.8 to 4.4 percent, according to the Fed's projections.

Central banks - usdIndex chart
Source: Conotoxia MT5, USDIndex, H4

Not only the Fed, but also the central bank of Japan in the spotlight

After the Fed's decision, it was time for the Bank of Japan's decision. This one did not decide to change the parameters of monetary policy, but mentioned possible currency intervention. The yen weakened earlier against the USD to levels not seen since 1998, exceeding JPY 145 per USD. The Japanese finally intervened on the yen today after 10:00 GMT+3 a.m. The USD/JPY exchange rate fell from around 145.80 to 142.20 in less than an hour. According to Bloomberg, this was the first direct currency intervention on the yen since 1998. "The Japanese government intervened in the foreign exchange market to support the yen," - Masato Kanda, deputy finance minister for international affairs, said. He spoke to reporters after the yen rose sharply against the dollar, erasing most of the decline following the Bank of Japan's decision to maintain ultra-loose monetary policy. Kanda added that Japan had taken "bold action" in the market.

wykres EUR/CHF a decyzje banków centralnych
Source: Conotoxia MT5, USD/JPY, m15

Switzerland's central bank raises interest rates

The Swiss National Bank (SNB) announced Thursday that it is raising its interest rate by 75 basis points, to 0.5 percent, from a negative -0.25 percent. The release said the SNB cannot rule out further rate hikes in the future and that it will be "active in the foreign exchange market if necessary" to ensure adequate monetary conditions. According to the BBN website, inflation in Switzerland rose to 3.5 percent in August, with forecasts for 2022 averaging 3 percent, for 2023 2.4 percent and for 2024 1.7 percent. GDP growth in 2022 is expected to be around 2 percent, although forecasts remain uncertain. "The biggest risks are the global economic slowdown, a worsening gas shortage in Europe and an electricity shortage in Switzerland. In addition, a recurrence of the coronavirus pandemic cannot be ruled out." - The SNB statement added. However, looking at the behavior of the Swiss franc after the SNB decision, it seems that the market expected more. The EUR/CHF pair rate rose sharply.

Central banks - chart EUR/CHF
Source: Conotoxia MT5, EUR/CHF, m15

According to a note published by a Bloomberg commentator, today's decline in the franc may be short-lived, while the SNB prioritizes the fight against inflation. A stronger franc reduces the impact of imported inflation. However, the strength of the franc should soon begin to have a subdued effect on inflation, according to the published note.

Bank of England on the horizon

The Bank of England will also join the festival of central bank decisions today. At 1 p.m., a decision to raise the main interest rate by 50 bps, from 1.75 to 2.25 percent, may be expected. This still seems to be the end of the pound's interest rate hike. From the point of view of market interest rates and expectations for future interest rates, the Bank of England rate could rise in the region of 4.5-5.0 percent in future quarters. The British pound, although trying to bounce back before noon, is still at its weakest against the USD since the 1980s. The GBP/USD exchange rate as of 10:50 GMT+3 is at 1.1327 on the Conotoxia MT5 platform.

Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.




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