FTSE +36 points at 7406
DAX +118 points at 12128
CAC +35 points at 5020
Euro Stoxx +29 points at 3438
The Federal Reserve (Fed) raised the interest rates by 25 basis points as broadly anticipated. Janet Yellen delivered a dovish accompanying statement. She said that the Fed is moving closer to its policy targets, adding that the policy remains accommodative and the Fed rates should be gradually increased to reach a neutral stance. However, the U.S. dollar sold off across the board as she didn’t hint at the next rate hike, nor showed too much concern regarding Donald Trump’s fiscal plans. On the other hand, President Trump proposed historical budget cuts for the most of the Federal agencies.
The U.S. dollar sell-off is the readjustment of the hawkish expectations, which have apparently, went ahead of themselves in the two weeks on the run up to the March meeting. This being said, the Fed remains on a hawkish diverging path vis-à-vis its G10 counterparts. The mid-term U.S. dollar bias remains positive.
As a knee-jerk reaction to the Fed announcement, the U.S. 10-year yields slipped below 2.50%, as the U.S. stocks rallied. The S&P500 gained 0.84% and the Dow Jones recovered 0.54%. Energy stocks lead gains as the U.S. oil crude inventories unexpectedly contracted by 200K barrels last week, versus 3.3 million rise expected by analysts and 8.2 million barrels expansion announced a week earlier. Financials traded on the back foot as Janet Yellen pushed back the Fed hawks and pulled the rate hike expectations back toward three rate hikes, instead of four in 2017.
As of today, the U.S. sovereign markets assess 50.2% probability for a June rate hike.
Across the Pacific, the Bank of Japan (BoJ) held fire. The BoJ left its short-term rate at -0.10%, and kept its yield-curve control policy and asset purchases target unchanged. The BoJ said to maintain its monthly bond purchases at ‘more or less’ the same pace, in line with the annual target of 80 trillion yen. Hence, the BoJ dissipated the tapering speculations after the recent decline in its weekly purchases. In fact, the yield-curve control strategy is an efficient safety net for the BoJ’s credibility.
With the U.S. yields trending higher, the BoJ will have the possibility to buy more JGBs to maintain the Japan 10-Year yield at about zero percent. The USD/JPY rebounded from 113.15 in Tokyo, yet the softer U.S. dollar could prevent the positive trend from picking up momentum until the Fed trading is over.
Gold rallied past its 100 and 50-day moving averages, $1207 and 1217 respectively. The yellow metal extended gains to $1227 in Asia. UBS analysts cited that gold could be an interesting hedge for investors. The cool down in the U.S. dollar rally could encourage a fresh attempt to the critical 200-day moving average, $1262, on weekly horizon.
Netherlands had good news for the euro. PM Mark Rutte’s Liberal Party beat Geert Wilders’ populist and anti-Islam Freedom Party (PVV) at yesterday’s general election. PVV obtained 19 seats in the 150-seat lower house of Parliament, versus 32 seats secured by PM Mark Rutte’s Liberal Party and 20 seats taken by Christian Democrats.
The EUR/USD rallied on the sweet combination of Dutch election results and the Fed announcement. The pair stepped in the bullish consolidation zone after clearing the 1.0707 (major 38.2% retracement on post-Trump decline). Stronger positive trend suggests a potential extension of gains to 1.0820/1.0830 (Fibonacci’s 50% level / 2017 resistance). We remind that the downside euro risks prevail on the run up to the first round of the French election due on April 23rd.
The European equities are set for a cheerful open on encouraging Dutch election results vis-à-vis the EU integrity and the euro.
Will cheerful investors underestimate the Citi’s comments that ‘Le Pen win would wipe out 25% from French banks’?
Now it is Bank of England’s (BoE) turn to announce its policy verdict. The BoE is expected to maintain the status quo at today’s MPC meeting. Released yesterday, the UK’s softer wages growth should not been a concern for Governor Mark Carney, who believes that slower wages are sign of stabilization in the UK’s labour market and should decrease the pressures on consumer prices.
Moreover, Carney has already committed to walk the UK through the potentially hard Brexit times. In this respect, the BoE would be ready to tolerate a higher inflation. In the light of the political and financial developments, the BoE has no reason to make a move today.
Cable rallied to 1.2309 for the first time in two weeks, yet traded under selling pressure in Asia. The GBP/USD softened 0.15% at the overnight session. The key resistance is eyed at 1.2338 (major 38.2% retracement on February – March decline), before 1.2408 (50% level, 50 and 100-day moving averages).
FTSE 100 remained capped at 7483p at Wednesday’s session, yet the early activity on the rolling index suggests a solid open in London. The FTSE is set to challenge the 7400p at the open; mining and energy stocks are poised for early gains despite the stronger pound.
The AUD/USD soared to 0.7717 in Sydney on the back of broad-based USD depreciation. The mixed jobs report dented the appetite in Sydney. Australian unemployment rate unexpectedly rose to 5.9% in February from 5.7% a month earlier. Yet, the economy added 27.1K full-time jobs versus 33.5K part-time jobs lost. In the short-run, the pair is considered in the positive trend above 0.7632 (major 38.2% retracement on post-Fed rally) and could make another attempt to the 0.7785/0.7800 mid-term resistance. In the medium term, improved U.S. yields could prevent carry traders from pushing the pair above the mid-term resistance.
Swiss National Bank (SNB) and Norges Bank meetings are on today’s agenda as well. The SNB is expected to revise the inflation forecasts higher, while keeping the sight deposit rates at the current rate of -0.75%.