Central banks to stay quiet for now, says CMC

But the Fed could clarify its big unknown – how new appointees will implement monetary policy in 2018

Federal Reserve
Federal Reserve: with a number of vacant seats on its executive team, it is unclear how monetary policy will be implemented when Trump fills those positions

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Most of the world’s major central banks are expected to remain on standby over the next three months, but the US Federal Reserve could further clarify how new appointees may move to implement monetary policy in 2018, says Michael Hewson, chief market analyst at CMC Markets.

The Fed is currently undergoing widespread executive changes on its board of governors. President Donald Trump has nominated Jay Powell, a current board governor, to replace Janet Yellen as chairman of the central bank.

While all of this gives Trump the opportunity to remodel the leadership of one of the world’s most powerful central banks, it also creates uncertainty for market participants regarding the kind of policy they should expect next year.

“This remains the big unknown for markets right now,” Hewson says. “What will the new board of Fed governors look like in 2018, and will they have a hawkish or dovish tilt to policy?”

Despite this, Hewson sees some bright spots for the US currency in the short term, telling FX Week the greenback will firm up slightly over the course of the next three months.

He thinks Brexit talks could give sterling a boost to 1.35, while the euro and the yen may head slightly lower to 1.17 and 114, respectively.

“Expectations around US rate rises for next year are currently too low in my opinion and around the turn of the year this should come into sharp relief,” Hewson says.

Last week, CMC Markets made a spot-on call on cable when it predicted the pair would trade at 1.33 in three months’ time. The firm also scored four close calls on other G10 pairs.

On the sterling front, I had more optimism than the consensus view, given UK data continued to show an economy that was outperforming expectations
Michael Hewson, CMC Markets

“In the aftermath of Jackson Hole there was a sense that the current move in the euro needed some consolidation time, at a time when some European Central Bank policymakers were starting to make concerned noises about the speed of the rally,” Hewson says, explaining the rationale behind his calls.

Earlier this month, the Bank of England raised its interest rates for the first time in approximately a decade to 0.50% from 0.25%.

“On the sterling front, I had more optimism than the consensus view, given UK data continued to show an economy that was outperforming expectations, despite all the political heat and light being generated by Brexit. I also felt the market was underpricing how likely the possibility of the next rate rise coming, although I didn’t expect it to come so soon,” he adds.

 

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