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Fed done, ECB and BoE to go

A relief rally following the Federal Reserve (Fed) meeting is what’s in play right now, as yesterday’s decision, though hawkish was mostly priced in. 

However,  the announcement that there will be a 75bp hike next year didn’t hit the investor appetite for these giant growth stocks. So, at this point, I am really wondering if we will ever see the reflation trade happen… The value stocks will sure progress well, but I am not sure they will outperform their tech peers. 

 

·         Now it’s Europeans turn to announce their latest monetary verdicts

The inflation talk is heating up in Europe as well, and the latest inflation data in Britain showed that inflation exceeded the 5% mark in November, while the BoE was expecting to end the year somewhere near 4%. 

 

Yet, no one expects to see a rate action from the BoE today. Nor from the ECB. And of course no action from the Swiss National Bank which swiftly follows the ECB in its decisions.

 

In the UK, the first rate hike is seen at the next meeting, and the chances are that we see a 20bp hike instead of a 10bp one. There is always a chance that we see a surprise hawkish action today, but the probability of such move remains quite low. Cable will likely extend losses in the coming sessions and the bears will aim an advance to the 1.30 mark in the coming weeks. 

 

For the European Central Bank, it’s complicated. The ECB must deal with a many countries that have many different needs, so making a policy decision is hard, and takes time. But the rising inflation will heat up the discussions of a tighter policy as well, because the Germans, the Dutch and the Austrians are tenser by the day as inflation explodes. 

 

Therefore, it could be another meeting Christine Lagarde turns a blind eye on inflation.

 

This being said, the hawkish risks prevail, preventing the EURUSD from extending gains below the 1.13 mark. Now that the FED hawkishness is priced in, we are left with the ECB hawkishness to price in. That will happen sooner rather than later, and encourage a recovery to 1.15 mark at some point in the medium run. 

 

·         Dollar holds tight as investors look beyond Fed to next big cenbank meetings

The dollar index, which measures the currency against six peers, was last at 96.391, having tested last month's 16-month high of 96.938 after the Fed's announcement before retreating to as low as 96.296.

 

Reference: CNBC, Reuters