Asian shares were mixed on Thursday morning following a rally on Wall Street overnight as markets offered an initial positive reaction to the Federal Reserve’s highly anticipated policy announcement. A sense of relief swept across financial markets despite the Fed’s more hawkish outlook on future policy to tame rising inflation. With the central bank offering investors clarity over its monetary policy moving into 2022, this removed a layer of uncertainty at a time where the Omicron threat and inflation fears have weighed on sentiment. King dollar initially spike higher but then weakened amid the positive market mood, while gold dropped below $1754 on Wednesday evening before sharply rebounding back above the $1765 support. European futures are green this morning, following the positive cues from Wall Street and Asia.
Now the Fed meeting is done and dusted, investors will direct their attention towards both the European Central Bank and the Bank of England monetary policy meetings today. While both banks are expected to leave monetary policy unchanged, the announcements will influence the direction of the euro and pound going into the end of the year.
Fed hawks steal the show
After much speculation, the Fed has finally adopted a much more hawkish outlook on future policy. This is based around the central bank not only announcing a quicker taper on bond purchases but also signaling three interest rate hikes in 2022. On top of this, the upgraded economic and inflation forecasts suggest that the Fed feel more confident over the US economic outlook, even with the Omicron threat looming.
From mid-January 2022, the pace of tapering will be doubled to $30 billion per month as expected. This will remain at $30 billion in February and likely come to an end in March. In regard to the economic forecasts, GDP growth for 2022 was raised to 4% up from 3.8%, while growth projections for 2023 were lowered to 2.2% down from the 2.5% forecast made in September.
The Fed’s revisions to their inflation projections are more interesting. The core PCE deflator for 2021 was bumped up to 4.4% from September’s forecast of 3.7%. For 2022, the Core PCE is expected to be 2.7% and 2.3% for 2023. These figures were also ramped up from the 2.3% and 2.2% respective estimates in September. With the Fed dropping the “transitory” description of factors fueling inflation from its post-meeting statement, this is likely to reinforce expectations over faster rate hikes. In fact, traders are currently pricing in a 49% probability of at least one rate hike by mid-March 2022 and an 84% probability of at least one hike by early May 2022.
Will the BoE surprise markets?
Uncertainty over the economic outlook and the possibility of more restrictions in the near future have strengthened the argument around the Bank of England standing pat today. However, market expectation over the BoE hiking rates jumped after official reports confirmed that inflation surged in November to its highest level in more than 10 years. Consumer prices hit 5.1% last month, which is now more than two-and-a-half times the 2% inflation target. Should the BoE surprise markets with a rate hike in an effort to tame inflation, this may inject pound bulls with renewed inspiration. Any hint of a hike during the first quarter of 2022 is also likely to support the pound.
ECB meeting in focus
The ECB faces questions over its asset purchases as today’s meeting was expected to be something of a “big bang”. But given how the fourth wave of Covid-19 is sweeping across Europe and the Omicron menace is disrupting economic activity, the central bank is likely to strike a cautious tone. Markets expect the ECB to confirm that the €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) launched in March 2020 will end in March 2022.
It will be interesting to see whether the ECB still sees inflationary pressures as transitory, especially when considering how eurozone inflation is currently at a record high of 4.9%. One key question for traders is what the ECB feels about Omicron and the implication for the economic outlook. Should the central bank maintain a highly accommodative stance with doves in the driving seat, this is likely to pressure the euro into the new year.