It’s been a pivotal week for global markets, and while trading volumes are set to drop into the Christmas break, global central banks have provided investors with an important toolkit to position for what lies ahead in 2022. Central bank messages this week have all focused on inflation and discussions around tapering.
In FX, the greenback has weakened against all G10 currencies since Wednesday. It appears that markets are partly relieved the Fed did not signal an even faster tapering. While this explains the short-term underperformance of the dollar, it can equally serve as a bullish-USD argument for the longer run, as it signals more room for Fed rate expectations to turn more hawkish – both on the tapering side (i.e. pricing in an earlier end of purchases) and on the tightening side (i.e. a hike already in 1Q22).
For today, markets will mostly re-assess weekly developments amid a very quiet US calendar. The risks are skewed towards the dollar recovering some ground as post-FOMC losses look exaggerated given fundamentals.
The loonie did see some further strength after the FoMC meeting, and this was indeed the case last night with the CAD extending its overnight move. Most expect that Macklem comments will gradually move toward commentary on rate hikes which will force the CAD to finally show some signs of strength. USD/CAD resistance seems to be ranging around 1.2810/20 with the pair likely to trade on broad market sentiment and Omicron-related headlines.
The ECB’s announcement and press release confirmed that the transition to action will be considerably more gradual at the ECB compared to the Fed and Bank of England. President Lagarde seems to have successfully conveyed the message that the ECB will continue to tolerate higher prices in 2022 without any tightening or significant acceleration in tapering. Put together, the ECB won’t close the gap with the Fed in the foreseeable future, which should keep a lid on EUR/USD in the new year.
Today, the German Ifo for November is the main highlight in the eurozone, giving a chance for markets to assess how far business sentiment has deteriorated amid tough restrictions and lingering supply strains. EUR/USD may edge back below 1.1300 before the Christmas holiday period depresses volatility.
The Bank of England surprised markets and consensus expectations by delivering a 15bp rate hike yesterday. From an FX perspective, this is a welcome development for the pound, as the BoE clearly sent the message that members are ready to act to curb inflation. For now, virus developments (and in particular whether the UK government will impose new strict restrictions) are set to remain the primary GBP drivers.
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