Interbank, central bank, Bank of England. At 12 pm GMT (8:00 am EST), the Bank of England (BOE) releases its monetary policy report today including its target interest rates. The current bank rate is set at 0.1%. The bank rate determines the interest rates the BOE pays to commercial banks which in turn impacts rates paid by commercial bank borrowing customers. This rate is important to traders because it provides valuable information that can be used to determine changes in inflation and yields on government bonds which in turn provides the trader with insights as to where foreign exchange rates will move.
The BOE’s current inflation target is 2.0%, but actual inflation is running at 3.1%. Since November 2009, the BOE has purchased £895 million in corporate and government bonds as part of its quantitative easing program. QE is intended to help lower interest rates and stimulate growth in the British economy.
Traders should contact their brokers for more information on how BOE’s interest rates decision may move foreign exchange rates.
Interbank, central bank, Federal Reserve. Yesterday, the Board of Governors of the Federal Reserve System announced that its federal fund and discount window rate target would remain between 0-.25%. In addition, the Federal Reserve will begin to reduce later this month its monthly purchases of US Treasury bonds and agency mortgage-backed securities. It will reduce its monthly purchase of US Treasurys from $80 billion to $70 billion. It will reduce its monthly agency mortgage-backed securities from $40 billion to $35 billion.
The Federal Reserve asset purchases were designed primarily to keep interest rates and stimulate the economy during the COVID pandemic. As more Americans are vaccinated and the negative impact of the supply chain congestion wanes, the Federal Reserve is seeing more reasons to trim its asset purchases.
The Federal Reserve has made it clear that the decision to taper asset purchases and the decision to raise the federal funds rate are separate issues. If, however, the taper policy was implemented to stimulate the economy by keeping interest rates low, traders should expect upward movement in interest rates as a result. Increased interest rates may have an impact on the direction of foreign exchange rates regardless of a Federal Reserve decision to increase the fed funds rate.
Traders should contact their brokers for more information on how the Federal Reserve’s fed funds rate and tapering decisions may move foreign exchange rates.
Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.