BoE increases, ECB holds, US dollar extends losses – All right for the Santa Claus rally
The rally in currencies and stocks continued on Thursday, with the downward movement expanding. All the major economic events of this year are behind us and clear the way for a Santa Claus rally. Some may argue that the rally, which typically lasts from the last five days of December to the first two days of January, started earlier this year. However, barring negative COVID-19 news, the current sentiment should continue until the end of the year. Many of our readers may find the past 48 hours of Forex trading puzzling, as the USD fell after the Federal Reserve forecast three rate hikes over the next year and the EUR after the European Central Bank made a rate hike very unlikely in 2022 had. The US data was mixed, with the numbers climbing from 39 to 15.4 and from 200,000 to 206,000. and stayed strong.
However, this is a classic case of buy rumors, sell news. The Fed confirmed what the market had largely expected, and after successfully setting expectations by telegraphing their lesser incentives early on, Chairman Jerome Powell avoided triggering a sharp correction in stocks. The same goes for the ECB. It has raised its inflation forecast and lowered its GDP forecast for 2022. It still assumes that inflation is in a “transition phase” in which prices will be moderately above target. According to ECB President Christine Lagarde, it is “very unlikely that we will raise interest rates in 2022”. This dovish bias would normally be bearish for the euro, especially against a restrictive Fed. But unsurprisingly, short cover climbed to the top of its two-week long trading range at the end of the year. We are still bearish on the euro but think it might be better to wait and sell closer to 1.1500. The latest Eurozone PMI reports confirmed weaker activity in the region as activity in manufacturing and services slowed in December. The German IFO report is due to be published tomorrow and we have every reason to believe that the business climate weakened towards the end of the year.
also shot higher after the Bank of England surprised the market with its first rate hike in three years. Given the recent COVID-19 restrictions and the surge in Omicron cases, no one expected the central bank to tighten, but the pressure is mounting. Inflation hit a 10-year high and the central bank felt it could no longer afford to just wait. It raised its key rate from 0.1% to 0.25%, which is a small but significant move. The tightening cycle has started and the market is looking for a second rate hike in February. While today’s sell-off is modest, we’re looking for a deeper dip below 84 cents, especially if we get strong tomorrow.
All three commodity currencies traded higher. Australia reported much stronger than expected employment growth. Economists looked to Australia to create 205,000 jobs, but added 366,000, the biggest increase in a month ever. With solid improvements in full- and part-time work, that jump completely dwarfed slightly weaker PMIs. They also benefited from good data. The economy contracted in the third quarter, but less than expected. Economists expected growth to decline 4.5%, but it only declined 3.7%. The rate rose on the weakness of the US dollar and a stronger employment report for Canada.