The ECB’s Forum at Sintra has become one of the key events for forex markets, and a lot happened over the last few days that could drive currency markets not just this week, but through the rest of the year. Having so many heads of major central banks at the same venue discussing monetary policy is a fantastic opportunity to compare their outlooks on rates. The convergence and divergence of global monetary policy are key factors that drive forex moves.
This week’s event was particularly notable because it marked a pivotal point for global monetary policy and could even set the stage for a new post-war, post-pandemic normal. If that were the case, it would be especially relevant for forex, as it would imply greater divergence among central banks, heightening market volatility. At the same time, central bankers suggested they would reduce forward guidance, increasing market uncertainty and potentially making currency moves more frequent and larger.
The “Back to Basics” Policy Shift
One of the highlights of Sintra that might have the biggest impact on forex in the coming months was ECB President Christine Lagarde’s opening speech. In it, she suggested that central banking was coming to the end of an era and would need to shift its communication style. This echoed views previously expressed by Fed Chair Keven Warsh, with the world’s two largest central banks likely setting the tone for the market.
Lagarde and Warsh seemed to concur that monetary policy is normalising after years of unconventional tools. Over the last several years, central banks have worked somewhat in tandem, facing the fallout of the COVID pandemic and then dealing with the surge in inflation afterwards. They used measures such as QE, emergency lending, and forward guidance to bring consumer prices back to target. Now that the objective has largely been achieved, decisions will return to being made on a meeting-by-meeting basis and be more data-dependent. In other words, cutting back on forward guidance that many investors relied on to predict where interest rates will go in the medium- to long-term, thereby driving currency valuations.
More Transparency and More Volatility
With central banks more reluctant to stay on a fixed path and reacting in real time to shifting data, economic releases could become much more important for currency moves. Central banks could change policy more frequently as they fine-tune inflation around the target, rather than sweeping hikes and cuts to deal with mass consumer price increases. Data releases like CPI and NFP could drive larger moves in the market.
The Panel (Lagarde, Warsh, Bailey and Macklem) Agree on Inflation
The main event of the Forum was a panel with the chiefs of the ECB, the Fed, the BOE, and the BOC. Given the recent pressures from higher energy prices, it wasn’t a surprise that they all agreed on reducing inflation. Price stability, after all, is the primary directive of the central bank.
What was notable was the force with which they addressed the issue, including Warsh’s notably hawkish comments about getting consumer prices back to target. Lagarde reiterated her position on the shift to conventional policy, which reduced the pressure to raise rates in the near term. Bailey was notable as the least hawkish of the speakers and emphasised the need for global cooperation.
