By Craig Erlam
We’re seeing plenty of different approaches from central banks as they wrap up their tightening cycles, with the Bank of England on Thursday surprising with a hold, while not adopting a particularly hawkish tone alongside it.
More important than the tone is just how close the vote was, with five policymakers – including Governor Andrew Bailey – voting to hold and four others backing a hike.
That puts us in hawkish hold territory, but what is interesting is the wide range of views within the MPC that comes across in the statement.
We’ll probably see a similarly tight vote at the next meeting, the outcome of which will be even more heavily driven by the data as there’s no overriding consensus on the committee.
Two things that particularly stood out in the statement were the view that inflation has fallen a lot and is expected to continue to do so, and the choice of words with respect to how long rates will stay high – “sufficiently restrictive for sufficiently long”.
While you could argue it’s just a bit cryptic, it’s far from the message that rates will stay higher for longer that we’re getting from the Fed, ECB and others. A number of policymakers may see the potential for rate cuts earlier in 2024 if data performs as expected.
Attempted hawkish hold from SNB
The SNB refrained from raising interest rates earlier Thursday, instead signaling that sufficient tightening has taken place in order to get inflation back to below 2% over the forecast horizon.
While inflation is already well below 2%, there was an expectation that the Swiss central bank would hike again and in effect mirror the actions of the ECB before calling it a day.
The decision did see the Swiss franc weaken against the euro, as you’d expect, despite Chair Thomas Jordan’s attempts to strike a hawkish tone in warning rates could still rise again if they deemed it necessary.
That seems unlikely now, instead, it will soon become a question of when we can expect rate cuts rather than hikes.
Profit-taking continues in oil
Oil prices are trending lower for a third day, with the Fed’s hawkish hold on Wednesday seemingly compounding fears that appeared to build in the run-up to the decision. The central bank was always likely to position itself as hawkish, but perhaps the dot plot was more so than many anticipated.
Ultimately, while the US economy showing resilience may be viewed as a positive in the short term as it supports demand, if that prompts the Fed to tighten further and hold rates higher for longer, it risks tipping the economy over the edge and into recession.
And it seems those fears are now weighing on crude prices after such a powerful rally over the last four weeks.
That will not be enough to trigger a significant reversal in crude prices, but rather provide an excuse for some profit-taking after such a huge rally.
The fact remains that the market is tight and running a large deficit. Until that changes, prices could remain elevated, and talk of $100 Brent won’t go away.
Gold pares gains
The Fed’s hawkish hold didn’t prove too popular with gold bulls either, despite some apparent optimism ahead of the release. Gold rallied toward $1,950 in the run-up to the decision, in line with the highs from earlier this month, before giving all of the day’s pre-release gains back and ending it in the red.
It’s trading a little lower once more and, depending on how seriously traders are taking the Fed’s dot plot, could be at risk of testing last week’s lows of $1,900.
Ultimately, that’s what it all comes down to. Will traders accept the forecasts or do they view them as a hawkish move to manage expectations, the latter of which could continue to support the yellow metal until we have more data.
Bitcoin edges lower
Bitcoin is trending a little lower, roughly aligned with how other risk assets have performed in the aftermath of the Fed decision.
Broadly speaking, not a lot has changed for bitcoin recently. There’s been some bursts of volatility but price-wise, it’s just fluctuating between $25,000 and $27,500.
Perhaps it’s simply a case of traders awaiting more ETF news, or other catalysts within the space, as the post-Fed move wasn’t particularly significant.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.