For the first time in a while, there is significant uncertainty as to the actual monetary policy decisions and the tone of communications from policymakers, and this should make for interesting and volatile markets. To cap off this critical week, we will get the nonfarm payrolls report for October out of the US, another important data point for the stagflation versus inflation debate.

GBP

A hawkish Budget statement with more tax increases than expected, in addition to spending hikes, had little effect on sterling. Markets are focusing squarely on expectations for central bank tightening, and the UK is no exception. Investors are now fully pricing in a 15 basis point increase in the benchmark lending rate this Thursday. We expect the Bank of England to follow through in what will be the first increase in interest rates among the world’s large developed economies.

The key, however, will be the degree of unanimity within the Monetary Policy Committee. Our educated guess is that a large majority in favor of a hike would be quite bullish for sterling. Looking beyond the short-term, the Bank of England will undoubtedly lead major economies in the process of removing monetary accommodation, which we consider a very bullish sign for the pound.

EUR

The ECB meeting last week was a confusing exercise in muddled communications. While Lagarde appeared to push back in a dovish direction, it failed to convince markets, and expectations for hikes were actually brought forward. Particularly strange was Lagarde’s implicit contention that the ECB knows better than other central banks about future inflation, given the abysmal track record of the ECB forecasts. The euro initially rallied against its peers, we think due to Lagarde’s comments on ending the PEPP as planned in March, although it gave up all of its gains and then some on Friday.

At any rate, there is little market moving news coming out of the Eurozone this week, so the Federal Reserve meeting on Wednesday will be the main event to watch for EUR/USD.

USD

US rates continued their relentless march higher, as markets price in the reality that inflationary pressures and shortages will last longer than the consensus expected just a few months ago. One of the trends making itself clear is that higher Treasury rates are only positive for the dollar so far as they reflect higher real rates, rather than additional protection from inflation.

The Fed meeting will obviously be key for the dollar this week. The FOMC is expected to announce the beginning of cutbacks in the pace of monthly bond purchases. More important will be the exact pace of the taper, and to see if officials push back against markets pricing two full hikes in 2022. Also important will be the US payrolls report, in which the focus will be whether budding wage pressures evident in the previous report ease.

Read here our FOMC meeting preview ahead of Wednesday’s meeting.