Central Banks and Tax Reform...
If you thought things were winding down for Christmas, you were very wrong! The markets have had busy 24 hours. Central bank decisions, high impacting economic data and tax reform progress to name but a few of the key influences over the past day.
Fed hikes
The Fed kicked off the central bank bonanza, hiking rates as expected, by 25 basis points, The Fed also increased growth projections, lowered unemployment forecast and stuck to the plan of three more rate hikes in 2018. However, the dollar wasn’t convinced, and persistent low inflation fears caused the dollar to tumble.
US Tax reform progress
This afternoon, the dollar has rebounded, thanks to impressive retail sales data and news that the US tax reform bill is quickly progressing through Congress, with the final bill possibly ready as soon as tomorrow, to be voted on next week. The prospect of this bill being signed and sealed before Christmas, has sent US equity indices to fresh record highs, whilst the dollar is recouping Fed inspired losses and heading back towards 94.00
BoE – No surprises
The Bank of England gave very little for the market to work with. All 9 members voted for rates to remain on hold, which was not surprising given the central bank raised last month. The pound barely budged as the BoE stuck to its “very gradual appreciation of rates” line. With the next rate rise not due for around 12 months, there was very little to get excited about. If anything, there was a slight disappointment in investors who may have been thinking that a Brexit deal would mean a more hawkish BoE – this was certainly not the case. The pound dipped slightly through the meeting, but GBP/USD remains comfortably above $1.34.
ECB – disappoint on inflation
The European Central Bank didn’t raise rates or adjust the QE programme, which they began tapering in October. On the positive side, the EU significantly increased eurozone growth projections, however investors were left disappointed with inflation forecasts. Even with the higher economic growth that the ECB are forecasting, inflation still won’t reach the 2% target by 2020. This higher economic growth is not translating into increased inflation as quickly as the market wants. As a result, the euro dropped sharply lower versus the dollar, breaking through $1.18. With few catalysts now until the end of the week, the euro could break through support at $1.1765 before dropping to $1.1740.
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