Rate hike expected (GBP)

The pound (GBP) experienced a short-lived rally following Bank of England Governor Andrew Bailey’s revelation that an interest rate hike could begin sooner than previously thought. Following the Monetary Policy Committee (MPC) meeting, Bailey told of a 50/50 split, with four of the eight committee members believing that minimum conditions for a rate rise have been met, compared to a unanimous 8-0 vote against a rate hike at the previous MPC meeting. The change in sentiment sends a strong signal that the increase is coming in the first half of 2022, though the MPC will likely want to see an end to quantitative easing in December before raising rates.

Bailey’s comments boosted the pound (GBP), but it failed to sustain any momentum, likely due in part to the array of political and economic woes weighing it down. At the top of the list of sterling’s concerns are labour market issues, the government’s controversial National Insurance hike and its failed attempt to renegotiate protocol agreed in the Brexit deal, which sought to end checks on goods arriving into Northern Ireland from elsewhere in the UK. UK GDP will be the next factor to influence the pound, coming into focus tomorrow.

It's ECB day (EUR)

All eyes are on the European Central Bank (ECB) today, which will meet this morning to make a decision on monetary policy. The meeting comes amid persistent inflationary pressures; core inflation rose from 0.7% in June to 1.5% in July, and sits at a near 10-year high. Hawkish members of the ECB subsequently signalled last week that a vote in favour of tightening monetary policy could be on the cards, and so investors are widely anticipating a potential reduction to the ECB’s Pandemic Emergency Purchase Program (PEPP). The PEPP was introduced in March 2020 and the Governing Council agreed that its termination would occur once the Covid-19 crisis is deemed to be over. More dovish members believe that the data doesn’t yet support PEPP trimming, so the vote could be close.

The announcement is due at 12:45 BST, and a decision to begin scaling back the pace of PEPP bond-buying will likely see the euro (EUR) strengthen, setting the tone for GBP/EUR and USD/EUR over the coming weeks and beyond.

BoC leaves key rates unchanged (CAD)

The Bank of Canada (BoC) met yesterday to discuss its quantitative easing strategy. As expected, the decision from the central bank was on the dovish side, leaving its key rate unchanged at 0.25% while also delaying any tapering of its quantitative easing program by continuing to buy bonds at a target pace of C$2 billion per week. The bank detailed in its policy statement that it is “Committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved". Currently, inflation remains above 3%, though the factors pushing it up are assured, as always, to be ‘transitory’.

The Canadian economy is expected to continue to strengthen throughout the second half of 2021, though the fourth wave of the Covid-19 and ongoing supply-chain issues may weigh on Canada's recovery. The CAD seemed to focus on the risks, giving up ground to both the USD and the GBP. Losses were limited, but the Loonie (CAD) will be looking to the next interest rate decision on October 27 for momentum.