It was a big short squeeze on Wednesday as the Federal Reserve’s upbeat take on the US economy was taken well by markets in America which should translate into a higher open for European markets on Thursday.
The Federal Reserve said it will be "patient" on the timing of the first interest-rate increase; replacing a pledge to keep borrowing costs near zero for a "considerable time"
The Fed raised its assessment of the labour market saying "Underutilisation of labour resources continues to diminish,” dropping the word “gradually” used in its previous statement.
As far as inflation the Fed said “The committee continues to monitor inflation developments closely,” It expects inflation to “rise gradually toward 2%.”
There was no mention of the unfolding crisis in Russia or emerging markets, keeping the focus on the US economy
Minneapolis Fed President Narayana Kocherlakota, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher all dissented.
The fact there were dissenters shows that there are still a wide range of views and the use of the word “patience” demonstrates no sudden overzealousness for a rate-hike just because of the stronger payroll and wage growth in November.
The US dollar surged after the Fed statement sending the euro and British pound down towards recently-made multi-year lows and all but undoing a chance of a larger recovery in those currencies.
Europe is not without its own risk in the forthcoming trading day after Greeks failed to elect a new president in the first round of voting.
Business expectations are expected to improve for a second month to 100.5 from 99.7 in the German IFO. This would follow another recovery in the ZEW but disappointing service PMIs this week.
Part of the reason for the improvement in confidence in Germany has been the ceasefire between Russian separatists and Kiev in Ukraine opening up the chance for trade ties to improve again with Russia. Recent developments in Russia have had a big negative impact on the Xetra Dax and pose a risk to confidence numbers for December.
The British pound may come under further pressure since UK retail sales are expected to slow in November. Bank of England minutes demonstrated no evidence of the UK being closer to a rate-hike and with consumer price inflation dropping to 1% this could remain the case for the next few meetings.
EURUSD – A bearish engulfing candlestick that closed below former support 1.2360 is a signal the euro could be about to resume its downtrend. The pattern does come within a trading range which negates its significance.
GBPUSD – The bearish daily candlestick in the pound like the euro engulfed the prior day with a low matching the prior multi-year low at 1.5550.
EURGBP – The euro-sterling cross followed through on the prior day’s evening star formation but not with much vigour, leaving some scope for another run higher towards 0.8035.
USDJPY – The dollar-yen rallied back to potential resistance at 119 from the November 20th peak. It would appear reasonable that price would need to fail again at 122 before being able to make a bigger correction lower.
Equity market calls
FTSE100 is expected to open 52 points higher at 6,388
DAX is expected to open 96 points higher at 9,640
CAC 40 is expected to open 36 points higher at 4,147
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