Viraj Patel, Research Analyst at ING, points out that since central bank governors descended upon Sintra in late June, there has been a synchronised – yet seemingly independent – positive shift in rhetoric that has left market watchers slightly confused.
“Though part of this confusion may be down to the concerted nature of recent hawkish talk, it’s also the speed at which market expectations have shifted that doesn’t quite sit well.”
“However, here’s an idea: what if the world’s central bankers were simply trying to engage with the notion of ‘Extremeness Aversion’ – that is offering an extreme option (in this case rate hikes) to anchor markets towards the middle ground (of stable policy). While this may seem a bit of a stretch, it does tie in with our view that markets should be factoring in greater two-way risks to policy – as opposed to the start of some synchronised global monetary normalisation. Indeed, we feel that markets in Canada and the UK have got somewhat ahead of themselves.”
“If it’s the job of central bank comms to realign market expectations to the reality of a more orderly exit from the world of emergency monetary stimulus, then it may be up to the more dovish policymakers to outline the conservative case. As such, all eyes will be on the FOMC’s Lael Brainard – who will be giving a timely speech on “Normalizing Central Banks’ Balances Sheets”. Equally in the UK, we will be focusing on remarks from BoE Deputy Governor Broadbent, who’s policy views we have yet to hear since the Bank’s recent hawkish shift. A dovish BoE reality check (and hawkish Fed confirmation) could see GBP/USD fall to 1.28.”
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