Thus far, central bank week has not disappointed as a number of banks have shifted their policy and outlooks including a major surprise this morning from the Bank of England.
Overview
Yesterday, the Federal Reserve announced it would keep interest rates as is and said it would double the pace of their tapering of monetary stimulus and complete their emergency bond-buying program by March 2022. All of this was expected.
The surprise came from the individual policy forecasts also known as the “dot plot” showed members expected three rate hikes in 2022, higher than the two hikes most market participants had expected. The initial knee-jerk was for the dollar to rally on the expectation of tighter policy than was previously expected. However, that move was short-lived.
In his press conference following the decision, Fed Chief Jerome Powell quelled market fears and bets poured in that the central bank would, as Bloomberg puts it, “put the economy on a smooth glide path back to a growth and inflation equilibrium.” Indeed, equity markets are up again this morning, and the dollar is weaker.
There morning’s data showed that jobless claims remain at good levels 206K versus 200K expected. The Philadelphia Fed Factory Index dropped to 15.4 versus 39.0 expectations. Expect traders to remain focused on central bank meetings, especially the Bank of England and European Central Bank.
What to Watch Today…
- No major economic events scheduled for today
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EUR
The European Central Bank did not surprise traders the way the Federal Reserve or Bank of England did, but the central bank did announce tweaks to their emergency bond-buying program. The ECB remains concerned about the omicron variant and the threats its poses to GDP.
The Governing Council decided to expand its bond-buying through its Asset Purchase Programme to help ease markets as the Pandemic Emergency Purchase Program (PEPP) ends in Q1 of next year. Despite the additional purchases via APP, the confirmation that PEPP will end was enough to boost the Euro. EUR/USD is up 0.5% at the time of writing.
GBP
The British pound is rallying this morning, up 0.7% so far, after the Bank of England surprised markets and hiked interest rates by 0.25%. The hike is the first in three years and comes as a surprise as the Omicron virus sweeps the U.K. and has prompted government rules to curb the virus. The vote was a nearly unanimous 8-1. Policymakers said more “modest” tightening is likely to be needed as inflation heads towards a peak in April, per their estimations.
Markets are now pricing in an 80% chance of an additional rate hike in February.
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