Overnight Headlines

*BoJ holds policy while signalling rising concern over the economy

*Chinese equity markets retreat after biggest 2-day rally since 1998

*Stocks traders brace for a $3.5 trillion “triple witching” event

*Dollar in doldrums amid Ukraine hopes while traders mull Fed outcome

US equities rebounded after Russia’s probability of default fell when the government reportedly made interest payments on its dollar bonds. The Dow and S&P500 rose 1.2% and the Nasdaq 1.3%. Global equities rose for a third day in a row with the Vix also lower for a third day to 25. Asian markets are mostly higher with modest gains after a volatile week. Futures are flat to marginally in the red.

USD fell for a second day with DXY slipping to a one-week low just under 98. EUR continued its recovery pushing into the resistance zone around 1.11. GBP recouped losses after the dovish hike from the BoE. It printed a “doji” candle but is trying to advance above 1.3160 again this morning. USD/JPY’s ascent has slowed around 118.66 as expected. AUD jumped 1.2% towards recent highs above 0.74. CAD is enjoying its fourth day of gains versus the dollar. The major is trading on its 200-day SMA at 1.26.

Market Thoughts – BoE more dovish than expected

The Old Lady delivered a third straight rate 25bp rate hike as forecast. But the vote was 8-1 with one dissenter preferring no change. This is a much more dovish split than the four members voting in favour of a 50bp hike at the prior meeting. It was also more cautious than many had anticipated this time around. Policymakers also played down the chance of more rate increases over the coming months as they see “risks on both sides”.

We wrote yesterday that the energy shock to prices may weigh on growth. Higher inflation is coming and is expected to peak at 8% in April. The market had expected four more hikes this year after the one yesterday. But this may be excessive and see cable struggle going forward. The UK is an energy importer, like Europe and is more sensitive to events in Ukraine than the greenback.

Chart of the Day – DXY holding above support

There is clearly more tightening to come from the Fed. The speed and the scale of that cycle is the major question. The consensus view had been for a terminal rate around 2%. But the FOMC told us on Wednesday that the median expected it to be 2.75%-3% by the end of next year. Meanwhile the market sees that number at around 2.35% in a year’s time, with cuts priced in for 2024.

The mild risk-on seen over the last few days has been dollar negative. Commodity currencies especially have performed well. The best dollar trend has been in USD/JPY with today’s BoJ further cementing its dovishness. The DXY struggled above 99 and a mini double top could be in play. This would see a move back to 96. But a major Fib level just below 98 is proving support again. The January high below here is 97.44.