The US dollar traded lower yesterday, while equities rebounded, despite the hawkish outcome of the Fed’s decision yesterday. As for today, the central bank torch will be passed to the SNB, the BoE, and the ECB, and although none of those Banks is expected to touch interest rates, it would be interesting to hear what they have to say their future course of action.
Tonight, during the Asian session Friday, we have another major central bank deciding on monetary policy, the BoJ.
Market Sentiment Improves Even After A Hawkish Fed
The US dollar traded mixed against the other major currencies on Wednesday and during the Asian session Thursday. It gained versus JPY and CHF, while it underperformed against AUD, NZD, and EUR in that order. The greenback was found virtually unchanged against GBP and CAD.
The strengthening of the risk-linked Aussie and Kiwi, combined with the weakening of the safe-havens yen and franc, suggests that markets traded in a risk-on fashion yesterday and today in Asia.
Turning our gaze to the equity world, we see that European indices traded mixed, but Wall Street rallied, with all three of its main indices gaining more than 1.0%. The NASDAQ gained 2.15%. The optimism, albeit somewhat softer, rolled over into the Asian session today as well.
Yesterday, the main event on the economic agenda was the FOMC decision. The Fed dropped the “transitory” wording regarding inflation from its statement as expected. It doubled the pace of its QE process, which means that conditional upon maintaining that pace for the months to come, the process will end in March.
Most importantly, though, the new “dot plot” pointed to three quarter-point rate increases in 2022 and three more for 2023, at a time when the financial community was fully pricing in only two lift-offs for next year.
In our view, the Fed was overly hawkish, even more than many market participants have been anticipating, at least according to the pricing of the Fed Funds futures. After all, that’s why the initial reaction at the release was a stronger dollar and a slight pullback in equities.
That said, everything turned around very quickly, with the dollar coming under selling interest and stock indices rebounding strongly. With no clear evidence as to why this happened, we can only assume that it may have been a position-covering move as the market as a whole was long dollars and short equities heading into the decision.
Perhaps some participants may have expected to lock profits after a potentially more hawkish Fed.
AUD/USD – Technical View
AUD/USD traded higher yesterday, after hitting support at 0.7094, near the upside support line drawn from the low of Dec. 3. That said, the recovery was paused near the key resistance of 0.7182, which has been acting as a ceiling since the beginning of the month. Thus, we would like to see a clear break above that barrier before becoming confident in more advances.
Such a break would confirm a forthcoming higher high and carry extensions towards the high of Nov. 23, at 0.7230. Slightly higher lies another key resistance zone, between 0.7275 and 0.7293, marked by the highs of Nov. 22 and 19, respectively, the break of which could carry more significant bullish implications, perhaps paving the way towards the peak of Nov. 15, at 0.7370.
On the downside, we would like to see an apparent dip below 0.7062 before we start examining whether the bears have gained complete control. Such a dip could confirm the break below the upside support line drawn from the low of Dec. 3 and may trigger declines towards that low, at around 0.6990.
Another break, below 0.6990, could confirm a forthcoming lower low and extend the fall towards the 0.6925 zone, which acted as a temporary floor back in July 2020.
SNB, BoE, and ECB's Turn in Deciding on Monetary Policy
As for today, the central bank torch will be passed to the SNB, the BoE, and the ECB. The chorus starts with the SNB, the meetings of which have been passing unnoticed for several months now. However, things may be different this time around, as concerns about how the new COVID-related restrictions can affect European growth have pushed EUR/CHF lower, near the 1.0400 zone.
With SNB officials maintaining the view that the franc remains highly valued, even when EUR/CHF was at higher levels, we see decent chances for them to strengthen their wording about intervening in the FX market to prevent the pair from moving lower.
Now, passing the ball to the BoE, we believe that all the attention will fall on interest rates. Following the outbreak of a new COVID variant and the new restrictions in the UK, market participants have pushed drastically back their expectations regarding a rate hike at this gathering.
The latest available data of the UK OIS (Overnight Index Swaps) suggest that a hike to 0.25% is more than fully priced for March 2022. We don’t believe policymakers will surprise the financial community by hiking today. Therefore, it will be interesting to see what they have to say for their future course of action.
Hints that they could lift rates sooner than the market pricing suggests could result in a rebound in the British pound. The opposite could be true in case they sound more hesitant.
A few minutes after the BoE, we have the ECB. No monetary policy action is expected by this bank. Still, it would be interesting to see what they are planning to do moving forward amid fresh lockdowns, but also accelerating inflation in the Euro area.
Officials could announce that PEPP (Pandemic Emergency Purchase Program) may be extended for a while more. However, even if they signal that it will still end in March, we believe they will be willing to compensate through other schemes, like the APP (Asset Purchase Program).
Combined with more warnings that interest rates are unlikely to start rising anytime soon, something like that could result in another round of selling in the euro.
EUR/GBP – Technical Outlook
EUR/GBP rebounded decently yesterday after it hit support at 0.8485. However, the rebound remained short-lived near the 0.8528 zone, still below the downside resistance line taken from the high of Dec. 8. Thus, with that in mind, we would expect the bears to recharge again at some point soon and push the rate lower.
The bears may decide to recharge from near the crossroads of the 0.8528 zone and the aforementioned downside line and perhaps aim for another test near the 0.8485 area. A break lower would confirm a forthcoming lower low and may see scope for more significant declines, perhaps towards the low of Nov. 29, at 0.8445.
To abandon the bearish case, we would like to see a strong rebound back above the 0.8553 barrier, which is the high of Dec. 14. The rate will already be well above the downside line taken from the high of Dec. 8 and may initially target the 0.8572 zone, the break of which could carry extensions towards the peak of Dec. 8, at 0.8600.
Elsewhere
Besides those three decisions, we also get the preliminary manufacturing and services PMIs from the Eurozone, the UK, and the US, as well as the US industrial production for November.
As for tonight, during the Asian session Friday, we have another central bank deciding on interest rates and this is the BoJ. With Japanese inflation near zero, well below the bank’s target of 2%, we don’t expect any material changes, neither to the actual policy measures nor the language in the accompanying statement.
Once again, the yen may not react to the outcome and stay driven by developments surrounding the broader market sentiment.