Last week’s Federal Reserve and BoE (Bank of England) meetings concluded with both central banks choosing to stick to what they had probably intended on doing all along, hiking official borrowing rates by 25 basis-points each. However, the uncertainty that surrounded those decisions ran right up until the decision date itself, predominantly because of ongoing concerns regarding financial stability and credit availability. One thing that became clear in the aftermath of the Fed and BoE decisions, is that additional tightening from here on out carries with it a very high hurdle in terms of macroeconomic outturns, or requires a rapid recovery in financial confidence, in my view. In simple terms, virtually every piece of economic data will have to overshoot (inflation, activity, confidence etc), in order to prompt sufficient reason for a hike, or the concerns over financial stability have to disappear almost as rapidly as they appeared. 

The focus for the markets is therefore how concerned or ‘spooked’ major central banks and bankers have been by the speed of recent events. So the focus for this week, and the coming weeks, is what the central bankers say, rather than what the limited data and survey releases indicate. The Fed has a plethora of speakers due this week, whilst the Bank of England sees Governor Andrew Bailey and resident ‘hawk in chief’ Catherine Mann speaking as well. The European Central Bank also has plenty of speakers due to make comments, including Schnabel and their own ‘chief hawk’ Rehn. The comments ought to be more guarded than the recent past (Powell's Senate Banking Committee testimony) from central bankers. Clearly the volatility of financial markets has caused some issues in terms of the direction of travel for monetary policy, and central banks will be hoping the uncertainty that has abated a little, can be further reduced by their own reassurances. 

This week will be interesting for the FX markets. In the absence of big data releases and in the aftermath of last week's central bank decisions, the initial trend for major currencies might be for them to track sideways and consolidate recent moves. However, with the deluge of speakers from major central banks, we could see the likes of the EUR and GBP attempting to make renewed gains if there are any signs that the US Fed's worries about the US economy are greater than those in Europe. There has already been a signal from the Minneapolis Fed President Neel Kashkari that suggests the US economy could be negatively affected by the weakening in credit availability associated with recent turmoil. 

 If GBPUSD is to renew its rally, it’s likely to have to push back through $1.2344 (last week’s high). Although for a confirmation of the GBP’s ability to gain in the medium term, a push above $1.2450 (this year’s high) is required. For EURUSD, the important levels are an initial push back above $1.0830, but a test of $1.09 was seen last week, so that’s where we need to be heading through if there is more upside to come. However, what will prompt that move? If there is a worry about credit availability, is that not more likely to see the most liquid currency (the USD) benefit from this? In previous mini-crises, that has been the trend. While some will point to the fact that this began in the US, I would remind readers that so did the financial crisis of 2008, and the US dollar gained more than 25% in the immediate aftermath of that. So markets should remain wary of USD losses, given the historical precedent, in my view. 

This week’s central bank meetings are set to see the Eastern European authorities of Hungary and the Czech Republic leave interest rates on hold. The Bank of Thailand is expected to follow that lead, but then the central banks of South Africa, Colombia and Mexico are all expected to hike by 25 basis-points, following the lead of the US Federal Reserve. There are reducing inflationary concerns amongst most of the emerging market central banks, which gives them latitude to do less, or no further tightening from here onwards. 

Emerging markets though are vulnerable if there is a sudden USD liquidity shortage, which could negatively impact the valuations of their domestic currencies. This may still prompt some additional upward adjustment in interest rates from many of these central banks in the months to come, dependent on how financial stability risks evolve, in my view.