Overnight Headlines

*Bank of Japan scales back emergency funding as pandemic strains ease

*Nasdaq closes sharpy lower as investors dump growth stocks

*Dollar falls as markets digest raft of diverging central bank decisions

USD fell on Thursday as investors’ focus turned to other central bank meetings. The DXY dropped to lows of 95.85 before closing around 96.04. GBP surged to a high of 1.3374 but eased to close at 1.3323. EUR/GBP fell to a low of 0.8453 after the surprise BoE hike and then recovered above 0.85. EUR/USD reached a high of 1.1360 and then fell back to 1.13. USD/JPY traded back below the pre-Fed levels. The spike earlier in the week in USD/CAD to 1.2937 saw prices move back towards 1.28.

US equities retreated led by weakness in big-tech names. The Nasdaq had its worst day since September falling 2.47% while the S&P500 shed 0.87% as heavyweight growth stocks underperformed. The Dow lost 0.08% after being up more than 200 points, with financials rallying. Asian stocks are mixed with US futures in the red.

Market Thoughts – ECB tapers cautiously

It has been a hectic few days of central bank meetings and trying to decipher their long-term impact. The ECB tried to dish out something for both the hawks and the doves. It tapered its emergency bond buying programme (PEPP) before the scheme ends in March next year. But it will purchase more bonds in its older scheme (APP) which remains open-ended and is a big victory for the doves.

However notably, inflation forecasts were moved sharply higher, as was the risk assessment. This added an element of hawkishness. So, the idea of trying to predict what the ECB might do in one- or two-years’ time is tough, especially when President Lagarde mentioned “flexibility” repeatedly. The bank has started tapering, but any rate hike chatter from policymakers is likely to be put off for as long as possible.

Chart of the Day – GBP/USD base built

Upside surprises to inflation convinced the BoE to tighten pre-emptively yesterday, despite mounting Omicron uncertainty. Perhaps the biggest surprise was how many MPC members voted for a hike, after the disappointment of not raising rates at its last meeting. The key question now is the path of the rate hike cycle and the timing of the next move.  

Cable had shown signs of stabilising around 1.32 before the meeting. A “rounding bottom” is often found at the end of extended downward trends and signifies a reversal in the long-term trend. Wednesday had a bullish outside reversal day and prices pushed up above 1.33 beyond the 50-day SMA after the BoE. Major resistance is 1.3411 and 1.3571/79.