Central Bank Meetings Ahead, Forex Outlook Cloudy

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Central Bank Meetings Ahead, Forex Outlook Cloudy

An important round of central bank meetings is at hand. Important because there is some expectation one or more bank will indicate policy tightening is near and with it a subtle shift in the balance of powers. Until recently the FOMC has been the only bank on a path of policy tightening. Now, expectations for the FOMC to ramp up the pace of tightening has dimmed while that for other banks to begin tightening, the ECB in particular, has begun to pick up.

The Bank of Canada has already released their statement and the first of a string of banks to report over the next 3 weeks. In their statement they make note of increasing economic momentum among the major world powers, the USA specifically, along with an expectation for growth to continue in Canada as well. Growth is expected to slow a bit in 2020, down to about 1.8%, before rebounding in 2020 and 2020. Slowing may be related to NAFTA uncertainty, what is a certainty is that a successful conclusion to renegotiations will be a boon for the nations economy.

The ECB is the bank traders really need to watch. The bank recently released minutes from the last meeting. In them the bank let slip the committee’s readiness to begin altering public perception about policy trajectory, an end result they have achieved with the minutes themselves. The news sent the euro spiking higher to break through a key resistance level and set new multiyear highs. Now traders are looking for confirmation of the change and that could come next week. If they don’t, or if they fail to meet the markets expectations, the euro could see a big decline versus the dollar.

The BOJ meets the next week, releasing their statement on Tuesday, time to be determined. The bank recently made an adjusted to their bond purchase program that the market took as a sign of tightening. The trouble is that the bank has made this type of adjustment before and is really not expected to embark on any kind of quantifiable policy shift in the near to short term. This has left the yen elevated versus the dollar and in danger of correction. Adding to risk is a general risk-on attitude among global market participants that is driving the riskier assets.

The FOMC’s January policy meeting is scheduled the very next day and could be another major mover for the market. The bank is expected to raise rates 3 times this year and possibly at the next meeting so any indication of hesitation or urgency will be taken very seriously. Recent data suggests the US economy is still progressing at the same steady month to month clip it has for some time, the difference now is that YOY gains are starting to add up and forward outlook is good if not robust. While underlying inflation is still below the target rate there are signs it is picking up and if that gets mentioned you can be sure the dollar will strengthen.

Federal Reserve policymakers increasingly divided on way ahead, minutes show

WASHINGTON (Reuters) – Most Federal Reserve policymakers supported the need for an interest rate cut in September, minutes of the central bank’s last policy meeting showed, but they remained divided on the path ahead for monetary policy.

The readout of the meeting, released on Wednesday, also showed that the Fed agreed it would soon need to discuss increasing the size of its balance sheet following ructions in short-term money markets. Fed Chair Jerome Powell announced an imminent expansion of the central bank’s assets on Tuesday.

Fed policymakers at the Sept. 17-18 meeting decided, in a 7-3 vote, to lower the benchmark overnight lending rate by a quarter percentage point to between 1.75% and 2%.

“Most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate,” the Fed said in the minutes. The U.S. central bank has lowered borrowing costs twice this year after having raised interest rates nine times since 2020.

But what remains unclear from the minutes is how a softening in economic data since that meeting will affect viewpoints on the need for further rate cuts, if at all.

In projections that accompanied the September statement, seven of the Fed’s 17 policymakers indicated they forecast one more rate cut this year. Five policymakers did not see any more cuts needed and the other five projected a rate rise by the end of 2020. Investors overwhelmingly expect another rate cut at the next meeting on Oct. 29-30.

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Since the meeting, economic data has increased fears that trade tensions are spilling over to the broader economy. U.S. manufacturing activity tumbled to a more than 10-year low and service sector activity fell to a three-year low in September. Consumer spending, which has been driving U.S. growth, has also begun to moderate.

The minutes “are consistent with already established division among the participants and a cloudy, if not stormy, economic outlook,” said Mark Hamrick, senior economic analyst at Bankrate.com, following the minutes.

Financial markets were little moved by the minutes, as investors focused on the ongoing trade saga. U.S. stocks and the dollar rose on a report China was open to a partial deal with the United States. U.S. Treasury prices were lower.

Graphic: The Fed’s ‘dot plot’ divisions – here


Fed Chair Jerome Powell is in the camp that views rate cuts that have occurred as necessary insurance in order to keep the longest U.S. economic expansion on record going and on Tuesday he flagged openness to more rate cuts to mitigate against such risks, repeating that the central bank will act “as appropriate.”

But others, such as Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, still do not see the need for rate cuts when the economy is growing moderately and unemployment is near a 50-year low.

The Fed has been near-continuously pilloried in recent months by President Donald Trump who called them “boneheads” ahead of the September meeting for not cutting interest rates more. Earlier on Wednesday, Trump criticized the central bank again. “The USA is doing great despite the Fed!” he tweeted.

The minutes showed Fed policymakers generally had become more concerned with trade risks and other headwinds to the economy, such as slowing global growth and the uncertainty over Brexit.

But that was where the consensus mostly ended. Several policymakers felt it would be prudent for the Fed to cut rates now to guard against risks while several others said the current U.S. economic outlook did not justify a rate cut.

“They contended that the key uncertainties were unlikely to be resolved soon. Furthermore, as they did not believe that these uncertainties would derail the expansion, they did not see further policy accommodation as needed at this time.”

Several policymakers noted that statistical models suggested the likelihood of a recession over the medium term had increased in recent months and a number warned that the labor market coming into 2020 may have been less strong than previously thought, pointing to Bureau of Labor Statistics preliminary revisions to payrolls data.

Policymakers also discussed a solution to recent volatility in U.S. short-term funding markets, the minutes showed.

At the September meeting policymakers agreed the liquidity crunch meant they would have to soon discuss expanding the Fed’s balance sheet but emphasized it “should be clearly distinguished from past large-scale asset purchase programs,” something Powell also made clear in his comments on Tuesday.

Several policymakers also suggested further discussion on establishing a standing repo facility, which would allow firms to borrow cash as needed at a fixed rate.

Reporting by Lindsay Dunsmuir and Jason Lange; Editing by Andrea Ricci

Market rates vs. Central Bank rates

Which exchange rates to use for corporate finance, tax, and accounting.

In recent years, Central Banks around the world have made the news in an unprecedented way, and with more frequency than ever before. From the Swiss National Bank event at the beginning of 2020 – and subsequent “flash-crash”- to the Chinese Yuan devaluation in 2020, central banks are undoubtedly playing much more aggressively on the global chessboard.

On top of this, macroeconomic and geopolitical events such as the fall of oil prices or the numerous chapters of the Brexit saga, are also having a deep impact on the foreign exchange market, resulting in increased volatility and currency rate fluctuations.

It is safe to say that the new normal in the foreign exchange industry is dominated by high volatility and that all actors involved are looking more closely at the economic calendar, especially when Central Banks meetings are on the schedule.

Another area where Central Banks play a more active role than they used to, is in the publication of currency exchange rates, in some cases mandating that companies operating in their territories of jurisdiction comply to the currency data they provide.

Market rates vs. Central Bank Rates

At this point, it is important to make a distinction between a market rate and a Central Bank exchange rate. Foreign exchange market rates are determined by supply and demand of market participants. Factors that affect the supply and demand are: geopolitical stability, employment outlook, trade balances and Central Bank actions. Since the foreign exchange market is an ‘over the counter’ market or OTC, different currency rates from different sources might all be valid at any point in time, as long as buyer and seller agree on it. Due to the nature of the currency market, providing an accurate rate becomes an art and a science; that’s why at OANDA, world leader in the forex industry, we are able to provide what is widely considered the gold standard in exchange rates since we are in the unique position to:

Access the main players in the foreign exchange market in real-time

Rely on a broad range of redundant (and reputable) data sources

Aggregate all the data points from one trading day

Calculate a time-weighted-average-price (or TWAP)

Deliver foreign exchange data automatically via API, as well as through our cloud-based Historical Currency Converter

A Central Bank exchange rate is also based on demand and supply, as well as other factors and guidelines. The European Central Bank (ECB) for example, published their reference rates taking into account the recommendations of the Financial Stability Board on foreign exchange benchmarks, as well as the principles for benchmark-setting processes in the EU drawn up by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) and the principles for financial benchmarks drawn up globally by the International Organisation of Securities Commissions (IOSCO). The issue here is that unlike the ECB, other Central Banks will follow only some of these guidelines or others altogether. Ultimately, inconsistency will emerge between the same currency pair between two Central Bank rates.

What does this mean for accounting, tax and CPA professionals?

Read our Newest Blog Series

Small and large organizations operating in countries where the local tax authorities only accept Central Banks as the source of FX data for financial reporting, sometimes struggle to find alternative FX data sources for specific countries, especially when it comes to leveraging exchange rates for automated processing and reporting. Most companies tend to implement a dedicated manual process for specific countries, while relying on their preferred automated source of currency data to retrieve market rates for all other financial operations.

Challenges with Central Bank rates

Technology and consistency. Central Banks can be unpredictable in how their data is published; they might make changes to the time of the day at which they release their data. For example, the Bank of Canada just announced they will update the delivery time of 26 currencies, which will be daily at 16:30 starting on May 1st, 2020. Also, the format, delivery method, and calculation method differs between Central Banks eliminating the option of “scraping” rates from their websites.

Coverage. The BoC example also shows us that not all currencies are being covered by Central Banks. For global businesses leveraging a single source of foreign exchange data, a Central Bank might not be the solution when the currencies they’re exposed to are not being covered by the bank.

Reference-only rates. In most cases, and certainly for the larger Central Banks, they are explicit in that the data being published is for reference only. In other words, not intended for use in evaluating transactions or risk. This leaves companies with a gap if they are using Central Bank rates to understand their market risk.

Which exchange rate should companies use?

The business and finance context determines which rate should be used. Where compliance with local regulations or accounting standards requires it, clearly Central Bank rates should be used in financial reporting. To understand a firm’s risk, price actual cross-border transactions, or to set products and services foreign jurisdictions, a true market price is required. And even in these cases, due to the OTC nature of the foreign exchange market discussed above there is no single source of truth for currency rates.

While there is no silver bullet, there are best practices that should be followed. Leading audit and accounting firms, tend to support companies’ decisions to streamline their FX data retrieval for accounting, tax and financial reporting when the process is fully automated, or in a suboptimal case when the data can be retrieved manually directly from its source (i.e. with a daily, weekly, monthly data download). Aside from the delivery method, the data is only as good as its source. The reasons listed below, in our experience, make a reliable foreign exchange data provider:

Deep knowledge in the complexities of the forex market

Access and visibility into the interbank forex market

Technology to produce an accurate TWAP

Reliable and automated data delivery systems

Though Central Bank rates might be necessary for businesses operating in certain countries, they clearly cannot be relied upon as the sole data source. Modern finance and accounting professionals leading global operations, need a comprehensive data provider to retrieve accurate and reliable market rates AND Central Bank rates in one flexible solution.

The OANDA difference

Having been at the forefront of the FX industry for over 20 years, OANDA is not only trusted for accurate and reliable forex data, but also for constantly adapting to new market regulations and staying within compliance of national and foreign policies. This is why OANDA offers Central Bank exchange rates for the Exchange Rates API, to automatically retrieve forex data for ERP systems, digital products, fintech apps, as well as accounting and treasury software. OANDA also offer Central Bank rates for the popular web application Historical Currency Converter, which allows users to manually retrieve data via convenient CSV download.

Businesses using OANDA now have access to 25 Central Bank exchange rates – and the list will grow over the 2nd quarter of 2020.

This comes in addition to the world trusted OANDA Rates®, market exchange rates which include over 38,000 currency pairs dating back to 1990.

Trump Urges ‘Big’ Rate Cut as Fed Faces Challenges

WASHINGTON — The Federal Reserve is poised to cut interest rates for the second time this year on Wednesday as policymakers try to get ahead of economic risks emanating from a global slowdown, President Trump’s trade war and uncertainty about the road ahead.

The central bank’s leadership is under immense political pressure from Mr. Trump, who denounces its reluctance to slash rates more aggressively on Twitter almost daily.

“Will Fed ever get into the game? Dollar strongest EVER!” Mr. Trump said in a tweet on Monday. “Big Interest Rate Drop, Stimulus!”

. The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!

The Fed, which operates independently of the White House, is expected to cut rates just slightly this week, to a range between 1.75 and 2 percent, in a bid to insulate economic growth as threats to the outlook mount. That remains far above Mr. Trump’s previously stated desire for zero or negative interest rates.

Yet even a modest cut could prove contentious as Fed officials wrestle with mixed economic signals and try to gauge whether Mr. Trump’s sometimes-hot, sometimes-cold trade war is creating economic uncertainty that can and should be offset by central bank action.

Two members of the policy-setting Federal Open Market Committee voted against the Fed’s July rate cut — its first cut in more than a decade — and may dissent against any further reduction at this meeting, given that the economy is growing and unemployment remains near a 50-year low. Another committee member has voiced support for a larger-than-expected move in the face of global risks.

That discord could make it more difficult for Jerome H. Powell, the Fed chair, to clearly communicate what comes next at a time when the economic outlook itself is particularly hazy.

Although many investors expect another cut in October and will hang on Mr. Powell’s every word for any hint at timing, Mr. Powell will probably try to keep the Fed’s options open. He has so far avoided committing the Fed to movement, saying only that it will do what is needed to sustain the economic expansion.

The big question facing the Fed is whether the expansion will need additional support from the central bank.

Inflation has shown signs of moving back toward the Fed’s 2 percent goal, and consumer spending, the job market and overall growth have remained resilient so far. But Mr. Trump’s trade war is denting business investment and exacerbating a manufacturing slowdown, and it is unclear how — or whether — it will be resolved. The United States and China are expected to meet again next month, and both sides have taken steps before that meeting to ease their trade fight. But a deal is not guaranteed, and Mr. Trump plans to impose tariffs on nearly all Chinese imports by the end of the year if one is not reached.

Adding to the mixed economic picture: Household confidence is wobbling, and the global economic picture is tenuous. Germany, Europe’s largest economy, is on the brink of recession, and Britain is grappling with its contentious exit from the European Union.

“The consumer is doing well, but there are other parts of the economy that aren’t doing well: manufacturing being the obvious one, but business investment is weak, and foreign demand is weak,” said Michael Feroli, the chief United States economist at J. P. Morgan, who expects policymakers to cut rates one more time this year. “I don’t necessarily think they have a plan to go again, but I think the economy will continue to look a little soft.”

A strike on a Saudi Arabian oil facility over the weekend could further complicate the picture. It will at least temporarily disrupt oil supplies and affect prices, though many experts say a severe shock to consumers is unlikely. Still, it opens the door to intensified geopolitical tension.

Heightening Mr. Powell’s communications challenge, the Fed will release new economic projections after the meeting for the first time since June. That means the Fed chair will have to knit his 16 colleagues’ interest rate projections into one comprehensive narrative.

While the Fed is closely monitoring short-term risks, its long-term challenges may be even more daunting. Interest rates will stand below 2 percent if the central bank lowers them this week, leaving policymakers with limited room to cut come the next recession. For context, they lowered rates by more than five percentage points in reaction to the 2007 to 2009 downturn.

“The Fed simply doesn’t have enough firefighting capability at its disposal to fight even an average next recession, let alone a financial crisis — anything that history would later label a Great Recession,” said David Wilcox, who directed research and statistics at the Fed until last year and is now a senior fellow at the Peterson Institute for International Economics. “We run the risk that the next recession will therefore be that much deeper, that much more prolonged — because the Fed won’t be in a good position to arrest downward momentum once it begins.”

Fed officials often say that they have tools left to bolster the economy. Still, they plan to discuss options for conducting monetary policy amid lower interest rates at their upcoming meetings. The conversations so far seems to center on keeping inflation from getting stuck in low gear.

The Fed aims for 2 percent annual price increases, but has not hit that target sustainably since formally adopting it in 2020. That matters in part because inflation gives the central bank headroom to cut interest rates, which do not strip out price gains. Lower inflation makes for even less room to maneuver.

One short-term fix, supported in a recent editorial by Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, is to promise to keep rates low until inflation moves back to, or even just above, the central bank’s 2 percent goal. In theory, such a commitment would prove the Fed’s seriousness and help to keep consumers’ and investors’ inflation expectations, which have been slipping, from sinking lower. It could provide extra stimulus by making investors expect low rates for longer.

President Mario Draghi of the European Central Bank, which is also facing stubbornly low inflation, made a softened version of that commitment last week.

At the Fed, other ideas up for discussion include aiming for 2 percent inflation on average over a period of time or targeting a price level, rather than a rate of change. Either plan would probably leave interest rates lower for longer after recessions as officials tried to make up for inflation shortfalls.

Some central bank watchers worry that tweaks to the framework could prove inadequate to restock the monetary arsenal, especially because Mr. Powell and his vice chair, Richard H. Clarida, often characterize the rethinking as “evolution, not revolution.”

“I hope that the Fed leadership will not feel constrained from adopting a new inflation control framework, merely because they have said that they’ll be evolutionary,” said Mr. Wilcox, who favors a higher inflation target. He said he also hoped for “an acknowledgment” that “there is a serious risk that our tools will not be adequate for fighting the next recession.”

“They need to give Congress the opportunity to pre-position a fiscal response to the next recession,” Mr. Wilcox said, indicating that the Fed should be transparent about its lack of monetary policy options so lawmakers can start to think of solutions.

The Fed does have more wiggle room than its counterparts in Europe, Japan and the United Kingdom, which have very low or even negative interest rates.

If the global economy tips into outright recession, “the Fed has monetary policy room to address all of that,” Mark Carney, the head of the Bank of England, said in New York last week. “The Bank of England, with various tools, is close, but not all the way there, and the E.C.B. is farther away.”

Mr. Draghi said Europe’s central bankers are unanimous on one point: Fiscal policymakers, the elected officials who make tax and spending decisions, need to step up their game.

But the Fed’s comparatively better position is hardly a bright side, because the American economy could feel the fallout if major global trading partners struggle to combat domestic slowdowns.

European Central Bank meeting

Our guide to the European Central Bank (ECB) Governing Council announcement – including why it’s important for traders, and its role in shaping the European economy.

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European Central Bank meeting

Our guide to the European Central Bank (ECB) Governing Council announcement – including why it’s important for traders, and its role in shaping the European economy.

Call 0800 195 3100 or email [email protected] to talk about opening a trading account. We’re here 24 hours a day, from 4am Saturday to 10pm Friday.

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When is the next ECB meeting and interest rate announcement?

The Governing Council’s monetary policy meeting is held every six weeks, with the next meeting scheduled for Thursday 30 April 2020.

The council’s decisions are always announced via press release at 1.45pm CET on the day of the meeting, followed by an ECB press conference at 2.30pm CET.

How does the ECB meeting affect traders?

The ECB’s Governing Council is responsible for setting monetary policy, with the aim of achieving an inflation rate of just under 2% across the euro area. Governing Council meetings are important dates in traders’ calendars as they set the official interest rates for the eurozone.

The ECB requires national central banks (NCBs) in the eurosystem to use these rates for transactions with commercial banks. The three key rates are:

  • The minimum bid rate: the rate for one-week loans
  • The deposit rate: the rate paid on deposits held with NCBs
  • The marginal lending rate: the rate for overnight loans

In addition to setting these rates, the Governing Council can also apply quantitative easing (QE) as required. QE involves injecting money directly into the economy with the aim of boosting spending.

These policies have a strong influence on the interest rates set by commercial banks and other lenders, indirectly affecting spending and inflation across the eurozone.

Of course, traders and investors are particularly concerned about the impact of ECB policy on demand for stocks, bonds, currencies and other securities, which may cause them to change their strategies. Many traders will therefore try to predict which way monetary policy is heading ahead of each meeting.

Why is ECB monetary policy important to traders?

Traders look to gain an understanding of what monetary policy will be in the future. If they can get their predictions right, they can optimise their portfolios ahead of any announcement to maximise their profits and limit losses.

Traders expect interest rate hikes to cause ripple effects that will reduce the value of their stocks, bonds and other securities, but increase the value of the euro relative to other currencies. Conversely, lower interest rates or the implementation of quantitative easing is likely to have the opposite effect.

Traders will therefore look at the composition of the Governing Council, the distribution of voting rights between countries, and broader economic factors such as Brexit, to make predictions about which way the ECB will vote.

Markets to watch

Prices above are subject to our website terms and conditions. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Get the latest European Central Bank news

ECB meeting preview: ECB expected to ease amid coronavirus slowdown

ECB meeting preview: strategic review key for ECB

​ECB meeting preview: Lagarde to set tone in her first meeting​

Markets ended a mixed week on a positive note

What are the key ECB rate decisions?

The main way the Governing Council seeks to control inflation is by changing key European interest rates, including the minimum bid rate, deposit rate and marginal lending rate.

    Minimum bid rate

The minimum bid rate is the rate national central banks (NCBs) in the eurosystem must charge for one-week loans. This is sometimes referred to as the main refinancing rate or ECB refi rate.

This rate is the lowest rate at which commercial banks can borrow capital, effectively acting as the base rate of interest for the eurozone. It has a strong influence on the interest rates charged by commercial banks to businesses and consumers. This, in turn, will affect the amount of spending, borrowing and saving across the economy.

Deposit rate

The deposit rate is the rate of interest paid on overnight deposits made with NCBs in the eurosystem. If the rate is increased, commercial banks get a better return on money deposited with NCBs. All other things being equal, this should encourage them to deposit more funds with NCBs and give fewer overnight loans to other commercial banks in the system.

The opposite is true if the rate goes down – banks get a lower return on any money deposited with the NCBs, which encourages them to deposit less money and give more overnight loans. The deposit rate is therefore another way the Governing Council can influence the supply of money in the economy.

Marginal lending rate

The marginal lending rate is the rate NCBs must charge commercial banks for overnight loans. These are loans used by banks to meet their reserve requirements for the day, ensuring they have enough cash to meet their clients’ needs.

The ECB sets this rate above the minimum bid rate to penalise banks for borrowing emergency funds to meet their reserve requirements. The wider the gap – or corridor – between the marginal lending rate and deposit rate, the greater the penalty. This corridor therefore affects how conservative banks are with their capital, and how willing they are to give loans to commercial and retail clients. This, in turn, affects spending across the economy.

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