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BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally

By Kathy LienForexDec 16, 2021 04:35PM ET
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BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally
By Kathy Lien   |  Dec 16, 2021 04:35PM ET
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The rally in currencies and equities continued Thursday, with the U.S. dollar extending lower. All of the major economic events this year are now behind us, clearing the way for a Santa Claus rally. Some may argue that the rally, which typically runs from the last five days in December to the first two in January, started early this year. But barring any negative COVID-19 news, the current mood should extend into year-end. Many of our readers may find the price action in forex over the last 48 hours confusing, as the USD weakened after the Federal Reserve projected three rate hikes next year and EUR strengthened after the European Central Bank said a rate hike in 2022 is very unlikely. U.S. data was mixed, with the Philadelphia Fed index tumbling to 15.4 from 39 and jobless claims ticking up to 206,000 from 200,000. Housing starts and building permits remained strong.
 
However, this is a classic case of buy the rumor, sell the news. The Fed confirmed what the market largely anticipated, and having successfully set expectations by telegraphing its less stimulus early, Chairman Jerome Powell avoided triggering a sharp correction in stocks. The same is true for the ECB. It upgraded its inflation forecasts and lowered its 2022 GDP predictions. It still believes inflation is in a “transitory period,” where prices will be moderately above target. So according to ECB President Christine Lagarde, it is “very unlikely we will raise rates in 2022.”  This dovish bias would normally be bearish for the euro, especially against a hawkish Fed. But without any surprises, year-end short covering drove EUR/USD to the top of its two-week long trading range. We are still bearish euros, but think it may be better to wait and sell closer to 1.1500. The latest Eurozone PMI reports confirmed weaker activity in the region as manufacturing and service-sector activity slowed in the month of December. Germany’s IFO report is scheduled for release tomorrow, and we have every reason to believe that business confidence weakened at the end of the year.
 
Sterling also shot higher after the Bank of England surprised the market with its first rate hike in three years. With the latest COVID-19 restrictions and Omicron cases on the rise, no one expected the central bank to tighten, but the pressure is growing. Inflation hit a 10-year high and the central bank felt that it could no longer afford to simply wait. It raised its base rate from 0.1% to 0.25%, which is a small but significant move. The tightening cycle has begun, with the market looking for a second hike in February. While the sell-off in EUR/GBP today is modest, we look for a deeper slide below 84 cents, especially if retail sales come out strong tomorrow.
 
All three of the commodity currencies traded higher. Australia reported much stronger than expected job growth. Economists were looking for Australia to add 205,000 jobs, but it added 366,000, the biggest one-month increase ever. With solid improvements in full- and part-time work, this jump completely overshadowed slightly weaker PMIs. The New Zealand dollar also benefitted from good data. The economy contracted in the third quarter, but by less than anticipated. Economists were looking for growth to fall 4.5%, but it dropped only 3.7%. The loonie traded higher on U.S. dollar weakness and a stronger ADP employment report for Canada. 
BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally
 

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BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally

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Comments (18)
George David
George David Jan 05, 2022 1:15AM ET
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I want to start trading how can I
Partap Singh
Partap Singh Jan 02, 2022 10:34PM ET
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thank you Kathy
Partap Singh
Partap Singh Jan 02, 2022 10:32PM ET
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madam why don't write daily means regularly
Mohd Izhar Muslim
Mohd Izhar Muslim Dec 19, 2021 4:21AM ET
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Thank you for the article, awesome 👍
look Around
look Around Dec 17, 2021 6:39PM ET
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1.1350 eu top gu 1.3350 to 1.1060 eu and 1.3060 eu why take a look at cot dollar 95.540 bottom to 98.377 😎 have a nice weekend ooh before i go see retailers sentiment as well
Dheeraj Dheeraj
Dheeraj Dheeraj Dec 17, 2021 1:57PM ET
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well dollar came back 🤣
Steve Bojo
Steve Bojo Dec 17, 2021 2:19AM ET
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Unlikely to happen
Chinedu Mmaduebo
Chinedu Mmaduebo Dec 17, 2021 1:41AM ET
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Nice one . Your article is always straight to the point without being too lengthy . Keep it up!
Rise Unlimited
Rise Unlimited Dec 16, 2021 9:54PM ET
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Hahaha..good work. Keep it up 👍 (Sells Call Options)
Raj Shekar
Raj Shekar Dec 16, 2021 9:44PM ET
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while everyone expecting it the manipulation results in a further correction. this is the post COVID strategy- to behave in opposite way
Fred Sp
Fred Sp Dec 16, 2021 8:28PM ET
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You never know. Markets change direction very quickly.
Jason Lebron
Jason Lebron Dec 16, 2021 7:49PM ET
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Hopefully you're right about that Santa rally !
Farman Khan
Farman Khan Dec 16, 2021 7:48PM ET
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will be down?
alebiosu waheed
alebiosu waheed Dec 16, 2021 7:43PM ET
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hello
Ayumastura PinkLady
Ayumastura PinkLady Dec 16, 2021 5:48PM ET
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please put ur writings in paragraph.
Hùng Nguyễn Trọng
Hùng Nguyễn Trọng Dec 16, 2021 5:48PM ET
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the mobile app doesnt show the paragraphs
Ayumastura PinkLady
Ayumastura PinkLady Dec 16, 2021 5:48PM ET
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i can see paragraph in writings of other analysts.
Sam Iam
Sam Iam Dec 16, 2021 5:44PM ET
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Good informative article, Kat. ECB can't raise rates. Only the US and BoE can do it.
gidz lhanda
gidz lhanda Dec 16, 2021 5:34PM ET
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Is dollar going down??
ARTKOS AUROCH
ARTKOS AUROCH Dec 16, 2021 5:34PM ET
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Until the Federal Reserve Chairman ******actually drops the USD is going down.
MK MK
MK MK Dec 16, 2021 5:34PM ET
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To the ground, where it belongs by fundamentals
Dave DoggyDogg
Dave DoggyDogg Dec 16, 2021 5:34PM ET
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not yet, we need hyper inflation and a competitor to the USD, until then let the real rates negative value lead to more leverage to boost profits while those that dont take advantage suffer (those suffering will be the other 99%).. feds care about the market... therefore the market indirectly dictates policy
Peter ONeill
Peter ONeill Dec 16, 2021 5:34PM ET
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Apart from a few tiny dips the market has been rallying since March 2020 and before that almost constantly since 2018 regardless of good / bad news. Why?????? It is not GDP growth that has seen stocks almost double in 3 years - but FED printing presses and debt. USA could well be $31+ Trillion in debt before the end of next year with a GDP of $23 Trillion. Debt / GDP hasn't been this high since WW2. The plan to escape this massive debt mountain? Borrow more....The market might have one more 'Santa Rally' before reality finally bites in terms of Inflation, Interest rates increasing, Chinese Cold War, Russian Aggression, UK/EU potential Trade war etc (which have all been largely ignored since 2020 as Fed flooded the market with cheap money...)
Savon Byrd
Savon Byrd Dec 16, 2021 5:34PM ET
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Well said ✊🏾
 
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