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Central banks are split into hawks and doves

Central banks are split into hawks and doves

The divergence smell is getting stronger in Forex

– My wife can’t anything

– You’re lucky, mine can do anything….

The last full week of September featured a series of central banks’ meetings. Some of them, following the example of the ECB, expressed the willingness to maintain monetary incentives. Others, despite economic downturns, Delta and the concerns about Evergrande default, are determined to normalize their monetary policies. Doves include the Bank of Japan, the Swiss National Bank, and the Riksbank. Among the hawks, determined to act aggressively, are the Fed, the Bank of England, and the central bank of Norway. On the other hand, a peaceful angel could turn into an active devil.

Despite all the fuss around Evergrande, the highlight of the week was the FOMC meeting. Ahead of the meeting, markets did not really expect any hawkish surprises, although they had some hopes. After all, Jerome Powell and his colleagues ensured that the wolves were full and the sheep were whole. They have not announced the QE tapering, and the consensus forecast for the first federal funds rate hike is still in 2023. On the other hand, half of the Open Market Committee officials expect that the first rate hike will take place in 2022. In addition, the Fed chairman hinted that the central bank would start scaling back the monetary stimulus in November.

– What does the proverb “The wolves are full and the sheep are whole” mean?

– It means the wolves have eaten the shepherd and hound…

I do not think the White House will refuse to re-elect Powell as the Fed Cahir after the FOMC September meeting. In fact, Powell looks like a dove in the flock of hawks, which the current government likes in general. Remarkably, investors now believe that the US economy doesn’t face any problems, although the FOMC has downgraded the GDP forecasts and increased the expected inflation rate. The Dow Jones has had its best two-day rally since February, and the leading stocks have been the securities of the financial and oil sectors, which tend to rise when the economy is doing well.

Two swallows fly low over the water, one of them says confidently,

– It’s going to rain.

– Why do you think so?

– People say that if the birds fly low, it is going to rain.

I don’t think the Fed has the “hall of mirrors” problem. Financial conditions are favorable, inflation target has been met, employment target has almost been fulfilled, so why not raise rates?

In the euro area, consumer prices are also growing, the economy is recovering, but the ECB is reluctant to normalize its monetary policy. Thus, there is the divergence that ensures the EURUSD downtrend. The GDP downturn is deeper in the currency block, and the problems, having occurred before the pandemic, are worse than in the USA. Investors believe that the ECB will boost its regular AP after the PEPP expires. As a result, the wolves (hawks) will be full and the sheep (doves) will be whole. The matter is whether the shepherd will survive.




Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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