FOREX Fundamental analysis on September 29, 2022
While investors were catching the news from the Fed, the Bank of England interfered in currency trading on the forex market, buying up debt securities, which was a shock for the financial markets. British bond yields fell sharply, dragging the rates on treasuries with them. Stock indices went up again and cheered EUR/USD.
How long will this boom last? The divergent actions of the new British government and the Bank of England are alarming investors. The regulator raises rates, suppressing demand and at the same time the Cabinet has cut taxes, further heating up inflation. Someone must be in charge and more decisive here. Either the government had to change its project, or BA moved to the dove camp. In the end, the regulator decided to buy bonds, triggering a peak in yields, which can be called a return to QE. This move will clearly drive up inflation, so the probability of a rate hike to 6% in 2023 has risen on the futures market.
In the United States, the increase in the cost of debt bonds has been called a "relief rally." After the rate hike to a record 4%, some kind of break was needed, which was the surge in debt bond volatility to the highs of the beginning of the pandemic.
The Bank of England's decision to expand QE to £65bn will certainly calm financial markets for a while. But will monetary expansion in the UK be able to put the brakes on the rise in treasury yields? Not likely. At best the markets will experience a corrective pullback, but not a trend reversal. This is also true for EUR/USD.
The Fed does not intend to slow down monetary easing, as evidenced by the statements of the FOMC members voiced this week. Committee members see the rate around 4.25-4.50% by the end of the year, and if everything goes according to plan, the dollar will continue to lead the forex market.
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