Overnight Headlines

*US stocks closed at all-time highs…again

*USD moved lower initially but is back above 94

*No surprises from patient Fed who trimmed bond buying by $15bn per month

*Oil prices extend decline after Iran sets date for nuclear talks

*US ISM non-manufacturing surged to a record level, ADP saw a big beat

US equities enjoyed the message from the Fed. Indices finished near their best levels with small caps (Russell 2000) again very strong +1.8%. There were no clear sectors or styles. The Vix ticked down close to 15, a one-year low. Asian markets are positive this morning even as increasing Chinese Covid cases threaten an already slowing economy. US futures are holding steady.

USD fell after the Fed announcement as more dovish talk disappointed those wanting rate hike signals. But the Fed did what was expected and USD is making back the losses. EURUSD again struggled above 1.16. GBP is capped by the 50-day SMA at 1.3705 ahead of the BoE meeting. USD/JPY printed a doji meaning some indecision, though is trading above 114.

Market Thoughts – No surprises from the Fed

The Fed engineered an orderly start to unwinding its massive stimulus programme. For what it’s worth, the amount of QE since the start of the pandemic totals $4.4trn. Chair Powell sprang few surprises and introduced some flexibility by saying that the tapering pace could be adjusted if needed. Most see the balance of risks to a faster pace with core inflation potentially above 5% next year. Currently, tapering is not tightening as the Fed’s balance sheet is set to expand next year.

With the meeting out the way, economic data will now be key with NFP up tomorrow. The recent dollar correction was at least partly down to other central banks becoming slightly more hawkish. But persistent US inflation may force the Fed’s hand going forward. The markets currently price a policy rate of 1.45% in three years, below the 1.80% median Dot Plot. Both of these are likely to be revised higher with persistent price pressures. This means an underlying bid for the dollar.

Chart of the Day – GBP/USD awaiting BoE

It’s slightly better than a coin toss chance that the BoE raise rates this year. Economists are divided too as the MPC battle with the familiar transitory question. Around four rate hikes are priced in for next year and the bank is expected to push back against this. This might be done by a downgrade of their inflation forecasts. The vote split will also be telling. It seems it will be harder to convince more doves for a series of hikes.

GBP has held above the key 1.36 level this week. A clear break down through this support sets us up for a test of the September low at 1.3411. If the BoE fail to push back convincingly against the current market pricing, we could climb up close to the 1.38 zone. Buyers then face trendline resistance and the 100-day SMA at 1.3763 and the 200-day SMA above.