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Dollar makes new lows after hawkish ECB and BoE meetings

Vantage Updated Updated Thu, 2023 December 14 11:28
Dollar makes new lows after hawkish ECB and BoE meetings


* ECB keeps rates on hold but united on seeing rate cuts later than market

* BoE holds rates with warnings of a “way to go” on inflation

* US retail sales unexpectedly rise in solid start to holidays

* Dollar hits levels last seen in August as Treasury yields continue to sink

FX: USD fell again as the fallout from the Fed’s dovish pivot carried on. The index made a fresh low at 101.77, taking out the November low at 102.46. US data was strong with retail sales beating estimates. Notably the control group also topped expectations, which is normally a positive sign for GDP. Initial jobless claims dropped towards 200k, another measure that the labour market is not cooling.

EUR surged higher above 1.10 before settling just below the figure. The November top is at 1.1017 with next resistance at 1.1064.

GBP was also an outperformer as the BoE kept its guard against any rate cuts. Three members opted to vote for hikes, and it reiterated its November guidance. Cable hit levels also last seen in August. Near term support is 1.2720.

USD/JPY fell for a third day, through the 200-day SMA and made a fresh low at 140.94. Treasury yields dropped sharply with the 10-year declining well below 4%.

AUD popped up to 0.6728 before closing just below 0.67. The relatively downbeat risk tone capped the upside despite a strong Aussie jobs report overnight. November employment crushed estimates, adding 61.5k jobs, well above the 11.5k expected.

Stocks: US equities made more new highs but closed off their tops. The S&P 500 added 0.27% to settle at 4720. The tech-laden Nasdaq 100 finished 0.15% lower to finish at 16,538. The Dow moved up 0.43% at 37,248. Energy and real estate were the top sector performers with consumer staples and utilities the laggards. Those first two sectors have underperformed this year. But investors are becoming more confident that a soft landing in the US economy can be achieved. The Dow closed at a second straight record high while the S&P 500 neared its record high.

Asian futures are in the green. APAC stocks traded mostly higher on Thursday. The Nikkei 225 enjoyed initial gains but then couldn’t keep above 33,000 amid selling in the banking sector. The stronger yen also didn’t help. The ASX 200 was led by rate sensitive sectors following the drop in yields.

Gold pushed north again and closer to $2050. Falling Treasury yields and the dollar are a tailwind. Markets price in around five 25bp Fed rate cuts next year.

Day Ahead – Digesting ECB and BoE Meetings

Both the ECB and Bank of England did what we thought. They kept rates unchanged at their meetings and railed against rate cut bets. The latter said rates will be kept restrictive for an extended period of time due to still high inflation and wage growth.

Later on and also as expected, the ECB pushed back against rampant rate cut expectations. The bank left rates at 4% but said they wouldn’t let their guard down on inflation. There were dovish hints in the statement and the new updated staff projections suggested growth risks were tilted to the downside. However, that doesn’t mean the bank wants to see rate cuts soon. This saw the euro rise sharply.

Chart of the Day GBP/USD surges through 1.27

Policy divergence is widening between the moderately more hawkish central banks like the BoE and the Fed’s dovish pivot. Going forward, data will need to back this up to sustain the gains seen in the respective currencies.

Cable finished above the peaks seen in late November and early December around 1.2725 after the hawkish hold by the BoE. Price action isn’t yet overbought with bullish trend signals still solid. Targets above include 1.2850 and 1.2905 if the pair can stay above the prior tops.