- BoE leaves rates and asset purchases unchanged as it warns on inflation.
- Fed and Chairman Powell set the stage for gradual tapering of bond purchases.
- GBP/USD falls below 1.3700 on Friday.
Two meetings this week indicate that the Bank of England (BoE) and the Fed are planning to taper and then end their extraordinary bond purchases. Sovereign and commercial interest rates have been held near historic lows since last March because of these programs.
On Thursday, the Monetary Policy Committee (MPC) voted 8-1 to keep the main rate at 0.1% after the option to reduce the £875 billion asset line received two additional votes.
After falling from 1.3741 on Monday to 1.3622 on Wednesday, GBP/USD soared to 1.3721 on Thursday following the BoE meeting.
Despite Chairman Powell’s remark that most members thought the criteria for a reduction in bond buying were met, the Fed’s meeting on Wednesday drew only a minor reaction in currency and credit markets. For the first time since the pandemic began 19 months ago, the central bank forecast a rise in funds rates next year.
GBP/USD dropped below 1.3700 after a reversal in US Treasury yields later that same week.
The BoE and Fed are moving towards the end of their pandemic economic support. For the moment, the Fed seems to be leading, and that will constrain sterling until the Old Lady catches up.
For the UK, the BoE meeting was the only market development of note. The purchasing managers’ indices for the services and manufacturing sectors for September were weaker than expected but remained firmly in expansion.
Stocks recovered from Monday’s massive sell-off in response to developments in China and returned to last week’s level on Friday. 90% of the US housing market performed as expected in August, and initial jobless claims rose for the second week in a row, but neither affected markets.