The week ahead looks set to be a busy one, with the key event the US Federal Reserve Interest rate decision. Should the FED look to begin withdrawing their QE purchases as expected, we could see some unexpected volatility.
With over $4.4 trillion worth of Quantitative Easing in place, the time has come for the Federal Reserve (Fed) to start turning back the clock on this unorthodox approach to central bank policy. The Fed have lead the way and set the scene for this QE, which many other central banks are all in the process of utilising.
The Fed starts to announce the scaling back of this QE process on Wednesday, which marks the half way point on a journey that started back in 2007. Some ten years later the Fed are only just about confident to undo the operation, a signal of both the size and scale of the programme.
This marks a return to ‘normalisation’, but really ‘normal’ has become the loose economic policy that the process of QE epitomises. All in all, the withdrawal of QE and rebalancing the Fed’s balance sheet will help to lay the path for other central banks. This will be closely watched by investors, and will help us to predict future outcomes for the other currencies as they also begin to withdraw and balance their books.
Whilst economically the US is on a path to normality in a political sense there are still concerns. Trump has failed to match the high expectations set from his appointment as President and this has seen the US dollar weaken.
The Eurozone is looking much more confident overall; the German election on Sunday will be the big test. Angela Merkel is ahead in the polls with her Christian Democratic Union (CDU) party on 37%. Angela Merkel should win the election which will only help to further improve the strength of the Euro. This further underlines the political strength of the Eurozone, which has been in place since the Macron victory. Markets were concerned at the beginning of the year that the Euro might struggle as populist far-right parties might win a large share of the votes. This has so far not materialised and a Merkel victory in the German election will further underline this trend.
Economically too, the Eurozone is performing well with an expectation that the ECB will be looking to taper their asset purchases in October. That doesn’t mean they are like the Fed in selling them back, they are simply considering tapering their expansion any further.
If we now turn to the UK, the Pound country is struggling both politically and economically. Infighting in the Conservative party could see uncertainty for the Pound as markets struggle to come to terms with what type of Brexit the UK will get. Friday will see a very important speech on Brexit by Theresa May in Florence, Italy. Brexit talks and the general direction of the UK’s future relations with the EU are unclear, and this speech on Friday could deliver some shifts in the outlook. The markets are desperate for some clarity but so far this has not been forthcoming. The expectation for the UK to raise interest rates is now higher than it has been before but ultimately, I think this will fail to materialise.
All in all, GBP looks likely to struggle as it is not just Brexit weighing on the neck of the Pound. Other currencies are benefitting as their central banks and politicians begin to adjust to some sense of normality. The UK looks to me like it will continue to be at the back of class in terms of economic strength. This week will be a key one in assessing to what extent the US is leading the pack, and to what extent the UK is bringing up the rear. From what I can see it looks like Sterling and the UK may continue to suffer, and could be on the back foot in the bigger schemes of things.
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