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BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally

By Kathy LienCurrenciesDec 16, 2021 21:35
uk.investing.com/analysis/boe-hikes-ecb-holds-us-dollar-extends-losses--all-clear-for-santa-claus-rally-200505192
BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally
By Kathy Lien   |  Dec 16, 2021 21:35
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The rally in currencies and equities continued Thursday, with the U.S. dollar extending lower. All of the major economic events this year are now behind us, clearing the way for a Santa Claus rally. Some may argue that the rally, which typically runs from the last five days in December to the first two in January, started early this year. But barring any negative COVID-19 news, the current mood should extend into year-end. Many of our readers may find the price action in forex over the last 48 hours confusing, as the USD weakened after the Federal Reserve projected three rate hikes next year and EUR strengthened after the European Central Bank said a rate hike in 2022 is very unlikely. U.S. data was mixed, with the Philadelphia Fed index tumbling to 15.4 from 39 and jobless claims ticking up to 206,000 from 200,000. Housing starts and building permits remained strong.
 
However, this is a classic case of buy the rumor, sell the news. The Fed confirmed what the market largely anticipated, and having successfully set expectations by telegraphing its less stimulus early, Chairman Jerome Powell avoided triggering a sharp correction in stocks. The same is true for the ECB. It upgraded its inflation forecasts and lowered its 2022 GDP predictions. It still believes inflation is in a “transitory period,” where prices will be moderately above target. So according to ECB President Christine Lagarde, it is “very unlikely we will raise rates in 2022.”  This dovish bias would normally be bearish for the euro, especially against a hawkish Fed. But without any surprises, year-end short covering drove EUR/USD to the top of its two-week long trading range. We are still bearish euros, but think it may be better to wait and sell closer to 1.1500. The latest Eurozone PMI reports confirmed weaker activity in the region as manufacturing and service-sector activity slowed in the month of December. Germany’s IFO report is scheduled for release tomorrow, and we have every reason to believe that business confidence weakened at the end of the year.
 
Sterling also shot higher after the Bank of England surprised the market with its first rate hike in three years. With the latest COVID-19 restrictions and Omicron cases on the rise, no one expected the central bank to tighten, but the pressure is growing. Inflation hit a 10-year high and the central bank felt that it could no longer afford to simply wait. It raised its base rate from 0.1% to 0.25%, which is a small but significant move. The tightening cycle has begun, with the market looking for a second hike in February. While the sell-off in EUR/GBP today is modest, we look for a deeper slide below 84 cents, especially if retail sales come out strong tomorrow.
 
All three of the commodity currencies traded higher. Australia reported much stronger than expected job growth. Economists were looking for Australia to add 205,000 jobs, but it added 366,000, the biggest one-month increase ever. With solid improvements in full- and part-time work, this jump completely overshadowed slightly weaker PMIs. The New Zealand dollar also benefitted from good data. The economy contracted in the third quarter, but by less than anticipated. Economists were looking for growth to fall 4.5%, but it dropped only 3.7%. The loonie traded higher on U.S. dollar weakness and a stronger ADP employment report for Canada. 
BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally
 

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BoE Hikes, ECB Holds, U.S. Dollar Extends Losses – All Clear For Santa Claus Rally

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Comments (2)
Barima Asumadu Sakyi
Barima Asumadu Sakyi Dec 23, 2021 22:07
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excellent write up. you are the best
Puk Pups
Puk Pups Dec 16, 2021 23:01
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Very clear information. Thanks
 
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