FX Update: Market reacts to Norges Bank and Bank of England FX Update: Market reacts to Norges Bank and Bank of England FX Update: Market reacts to Norges Bank and Bank of England

FX Update: Market reacts to Norges Bank and Bank of England

Forex 3 minutes to read
John Hardy

Head of FX Strategy

Summary:  Currencies continue to find little inspiration from fundamentals and a strong correlation with the swings in risk sentiment, but a couple of central bank meetings today did see two of the G10 currencies swinging into gear, namely NOK and GBP over their respective central bank announcements, with both seeing a more positive tone than expected.

An FT article today (“The fall of currencies under the spell of stocks worries strategists”) opined on FX analysts’ discomfort and inability for FX to react much anymore to traditional fundamentals. I sympathize with the situation and have found this market a struggle as well, with everything seeming to line up these days in some degree of correlation- and beta to the swings in risk appetite, something I have noted for weeks in this space. Alas, today provided a bit of distraction with the market reacting to central bank decisions in Norway and Sweden today (SNB not to be forgotten as well – more in the G10 rundown there.)

Shortly put, Norges Bank signaled a more positive outlook than with its prior forecasts as it forecast a much smaller growth hit this year than previously (-3.5% vs. -5.2% with the prior forecast) and said that the 2021 rebound for the mainland would be on the order of +3.7%, so voila, back to index 100 by the end of next year for the economy – about as rosy as it gets. We all know that central bank forecasts are as bad as yours or mine, but this at least alleviates any sense that the Norges Bank will consider new measures, and really a bit surprising so see NOK jumping so aggressively stronger here, when paying for the fiscal stimulus for Norway is uniquely funded through their petroleum fund anyway – rather than through debt financing from the government.

The Bank of England was a bit more of a surprise for the market as there was considerable division on the size of the increase the BoE would announce for its asset purchase target, with many agreeing on a GBP 100 billion increase, but some forecasting double that amount. The Bank of England effectively skirts that problem by simply declaring that it is happy to alter policy as necessary from here while stating that the damage done in Q2 appears so far to be less bad than originally feared.

Sterling jolted stronger in kneejerk reaction, but I don’t see the guidance as any firm commitment to a policy path from here – the UK is just now poking its head out of the door after the extreme lockdown measures and the BoE likely feels a need to stay nimble and react to the uncertain path of the recovery from here – much as the Fed’s QE guidance retains maximum leeway by allowing it to taper or increase at will without tripping over previous guidance. The 100B increase buys 8-12 weeks of QE at or beyond the treasury’s issuance of Gilts (currently purchase are over 13 billion per week, beyond the issuance of a couple of billion lower, so could be slowed slightly and still be fully covering issuance) – plenty of time to either announce a tapering of purchases down the road if the recovery is going gangbusters and treasury needs are set to fall or to double or triple it and add, for example, corporate debt and more if markets are in a deepening funk and systemic risks to the financial system return.

GBPUSD explored the full extent of the downside range just ahead of the BoE meeting and then jolted higher in reaction to the 100 billion increase in the BoE’s asset purchase target. The lines in the sand are clear, and as we state above, the purchase target increase of “only” 100B could be expanded at will further out without, while negative interest rates are still a possible consideration further down the line if the UK economy remains in dire straits and, for example, the BoE wants to juice asset (especially real estate) markets to keep animal spirits high. For now, the quickly selling of sterling back down toward 1.2500 after the knee-jerk higher makes the pair look heavy, although to avoid the current limbo, we need a close today to new lows set up a bearish tactical outlook for a possible test of the 1.2355 Fib retracement area, the last major retracement ahead of the sub-1.2100 lows.

Source: Saxo Group

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.