The British Pound is not strengthening as expected despite hawkish rate hikes from the Bank of England. The market is pricing in the negative growth impact (stagflation) of tightening policy during an energy-driven supply shock, which is offsetting the typical appeal of higher interest rates.
Despite a surprise 25 basis point rate hike by the Reserve Bank of Australia, the Australian dollar failed to rally. The governor's explicit concern about not wanting to exacerbate the tightening of financial conditions signaled that domestic economic underpinnings for the currency are weakening, overriding the hawkish policy move.
A significant disconnect is emerging between calm spot FX markets and anxious options markets, particularly in emerging economies. Historically, when option market indicators like risk reversals reach extreme highs, the spot market tends to "play catch up," suggesting potential for future volatility despite current stability.
The Swiss National Bank will intervene to slow rapid appreciation of the franc but won't defend a specific level. Sustainable currency weakening requires a return to sustained asset sales, which is not current policy. This suggests that any temporary weakness in the Swiss franc following S&B announcements is a potential fading opportunity.