Central banks in retreat

An uninspiring start to trading on Tuesday, with Europe and the US hovering around flat on the day as focus turns to central bank meetings in the coming days.

The RBA got us underway today and to put it mildly, the performance was underwhelming. At a time when central bank communication is so important, policymakers have failed miserably this past week when put under pressure by the markets.

To simply abandon a policy tool, without warning, days before a meeting is unforgivable. It undermines their credibility after a period in which unconventional tools and trustworthy central bank communication has been the cornerstone of their monetary policy response, to borrow a phrase from another central bank that abandoned its flagship policy with far more severe consequences.

Other central banks have been on the PR offensive when it comes to preparing markets for upcoming policy changes. The Federal Reserve is almost certain to announce tapering on Wednesday as it pares back its pandemic response and prepares for rate hikes next year.

Given the path of travel for central banks around the world, I expect it will gradually accept that some hikes will be needed once tapering draws to a close, perhaps even immediately after. But that will become much more apparent in December when new forecasts are released.

The Bank of England won’t wait that long and may even start raising rates on Thursday. The market appears split on whether they will move this week, with either no change or a 15 basis point hike the likely outcome. While I’m probably in the latter camp, I wouldn’t be surprised if they even opt for 25 to give the tightening process a kick start.

There is the argument that they should wait until December to see what impact the end of the furlough scheme and benefits top-up, higher energy prices, Covid etc will have on the economy. This makes sense, except for the fact that the MPC wanting to raise rates is an inflation play, not a reflection of our booming economy. Whether they act this week or next month makes little difference.

Bitcoin heading for new highs?

Bitcoin is continuing to recover from its post-ETF pullback today, trading a couple of percent higher on the day and testing resistance around $63,500. How it trades around here could tell us whether we’re seeing a corrective rally as part of a deeper pullback in the bitcoin price, or another run for record highs. Whichever it is, I don’t think it will be long before we’re seeing the latter as there’s so much hype in the space right now.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/



This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

Latest posts by Craig Erlam (see all)