Central Bank Watch Overview:
- As 2020 comes to a close, 2021 doesn’t look like it will bring about much change in terms of central banks’ policies.
- None of the Bank of England, European Central Bank, or Federal Reserve are expected to raise interest rates in the new year. The Fed is likely to lead all central banks in terms of easing, which leaves the US Dollar[1] at a disadvantage.
- Retail trader positioning[2] suggests that the major currencies are on mixed footing heading in 2021, which may simply be a reflection of lower trading activity during the Christmas-New Year’s interlude.
Central Banks’ Exciting 2020 Yields to Quieter 2021
The final week of the month has seen little by way of central bank activity – fairly typical for the Christmas-New Year’s interlude. But the lack of activity in terms of new announcements or policy changes veils what has otherwise been another banner year for central banks. Central banks have added over $7 trillion to financial markets since March 2020, led by the Federal Reserve’s expansion of its balance sheet by over $4 trillion.
Looking ahead to 2021, no major central bank is expected to raise rates in the new year.Even if the global economy heats up, central banks will not tamper with the early stages of a global recovery and pullback support to markets in 2021. ‘Overshooting’ of inflation targets will be popular conversation among central bank watchers, a suggestion that interest rates will stay low for many more years.
Even if growth is gathering pace, traders shouldn’t be surprised if the major central banks (Fed, ECB, BOJ) announce additional quantitative easing measures. We’re in a period immediately post-crisis – an appropriate historical allegory in early-2009: low interest rates and ample liquidity.
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