Will the BoE be able to thread the needle?

The single currency collapsed on forex on Thursday by more than 2% to 1.1560 USD after the ECB comments, demonstrating the sharpest fall since the Brexit two years ago. Most observers notice that lack of desire to raise the rates for the next year is the main reason for it. Taking into account an active increase in rates in the United States and raising inflation in the euro zone, such caution looks excessively dovish.

Among other reasons behind the forex reaction on Thursday we should also mention more resolute attitude of the Fed, voiced on Wednesday evening. The proximity of these two events highlighted the contrast between intentions of two most important world's central banks. The reaction of the forex market to the Fed's comments seemed excessively moderate, as the players preferred to wait for the ECB's comments. But eventually it increased the euro's collapse on Thursday and impeded the advance of dollar on Wednesday.

However, the euro's reaction looks very sharp. A few years ago, the Fed acted roughly at the same pace. Today ECB simply copies what the Fed did some time ago. The intention to raise the rate 'next year' appeared in the Fed statement in December 2014, exactly the year before the increase. But on appearance, in 2014, it caused a sharp rise in the USD.

It is likely that once the dust settles, the biggest sufferers could be the EM currencies, same as in that episode a few years ago.

The Bank of Japan was able to note this optimism on Friday morning, keeping all the key points of the commentary in the policy unchanged, but maintaining confidence that inflation is accelerating.

The main thing that can be taken from the Fed and ECB meetings this week is that the largest central banks confirmed the departure from the crisis measures and are ready to accelerate their normalization policy.

In this light, it will be very intriguing to see the BoE's position the following Thursday. Although inflation and earnings have fallen short of expectations, and industrial production has dramatically declined, employment and retail sales beat expectations. The fall of the pound by 8% to dollar since mid-April is a pro-inflationary factor, therefore it is more likely to expect more hawkish tone, but without actual policy tightening.

In the global context, one cannot ignore the fact that the divergence of the monetary policy between the United States and other major central banks has almost disappeared. The ECB collapses its QE. Canada increases its rates. The effect of the measures used by the Bank of Japan is declining. Other CBs also claim that the next step will be tightening.

The bulk of developing countries are protecting their currencies from falling against the dollar by increasing their rates following the growth of interest rates in world markets. The most vivid examples are the central Banks of Argentina, Turkey, Mexico, and China.

Now almost all CB's move in one direction, and the Unites States and USD have a handicap. However, historically in this race the U.S. usually acted less decisively, making less increases than they should.

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