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UPCOMING GLOBAL CENTRAL BANK MEETINGS: WHEN & WHAT TO WATCH

Published on July 13, 2017

While global equities markets have maintained significantly lower volatility during the first half of 2017, political and monetary policy uncertainty may have dampened the upside - though U.S. equity markets continues reach new highs. In recent months, investor focus has returned to diverging central bank policies and what the future holds for interest rates: there’s scrutiny on European Central Bank (ECB) policy, debate around the Bank of England’s (BoE) approach to Brexit, and shifting expectations for further interest rate hikes from the Fed. Here’s a quick look at what to watch for during the upcoming monetary policy meetings.

What to Watch: ECB Meeting on July 20

In the Eurozone, the economy has shown signs of accelerated growth. Political uncertainty in relation to key elections in the Netherlands and France has alleviated, and the latest economic data suggests the single-currency bloc is enjoying a broad-based recovery in 2017 so far. While the tone continues to err on the side of caution, the ECB has hinted it may be softening its position on monetary policy; some see this as a signal the Bank is believed to be considering gradual first steps toward tapering its stimulus program, but that remains to be seen.

What to Watch: Fed Meeting on July 25-26

In the U.S., the Fed has been gradually raising interest rates. June saw the second rate hike of the year, increasing the range by a quarter point from 1% to 1.25%. The Fed policymakers have reinstated their positive outlook for the economy, as it showed signs of recovery during the second quarter, with unemployment currently at the lowest levels recorded since 2001 (4.4% in June). However, factors such as recent weak inflation readings, shifting market forecasts and the political backdrop continue to be closely monitored. A further rate increase before the end of the year may not be a given; the market will be watching the Fed’s language closely for signals.

What to Watch: BoE Meeting on August 3

In the U.K., the uncertain political environment and challenges around Brexit, and the subsequent short- and long-term impact on the economy, have been central issues of focus for investors. The snap general election in June produced a little-expected and inconclusive outcome, which served to deliver a fresh injection of complexity and political volatility. Official EU exit talks began in June, and the U.K. government has found itself under increasing pressure to adapt its tactics and Brexit stance going into the negotiations. As a result, sentiment regarding the UK economy remains mixed.

Similarly, there are diverging opinions around the most prudent strategy for the BoE to adopt over the coming months. Following the latest Monetary Policy Committee (MPC) meeting, the rate remained unchanged at 0.25%; however, the vote was not unanimous. The split sparked uncertainty as it indicated the base rate could rise sooner than what markets had priced.

Managing Rates Exposure

In light of a rejuvenated macro outlook, a wide range of market participants are looking to manage risk, and they’re relying on deep liquidity throughout the curve across a variety of products to help them adjust their positions quickly when needed. Leveraging ICE’s European interest rate complex, market participants may efficiently manage exposure and capitalize on opportunities. For example, participants quickly turned to ICE’s markets to adjust their rates exposure following the BoE’s June MPC meeting, driving ICE Short Sterling futures to an all time-high trading record of 3.35 million contracts in a single day.

Growing liquidity in ICE interest rates can be seen in a many products, including:

  • Euribor – Open interest (OI) for Euribor futures is at a 4-year peak, while Euribor options average daily volume (ADV) is at the highest since the ECB was actively cutting interest rates a year ago.
  • Short Sterling – Supported by the increased focus on the UK and its markets, Short Sterling futures volume reached record volume in the second quarter, with strong activity in options as well.
  • STIR Futures – In the aggregate, our short-term futures complex traded 4.5 million contracts on June 28, a record day.
  • Gilts – A new OI record for Gilts of 828,398 contracts was reached in May.
  • DTCC GCF Repo Index® - The contract had strong ADV and OI prints for June as market participants hedged higher than anticipated quarter end cash market funding pressure.

As shifts in central bank policies continue to present new risks and opportunities in the global marketplace, investors who have or need interest rate exposure can rely on the liquidity and breadth of our global suite of interest rate futures and options to hedge risk and express market views.

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