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Rhetoric from Fed Chair Powell was slightly less hawkish than expected

Posted: 12th January 2022
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Trade ideas & Daily market report January 12th 2022

Market highlights.

  • Rhetoric from Fed Chair Powell was slightly less hawkish than expected on a potential shrinking of the balance sheet.
  • Risk appetite strengthened following Powell’s comments despite underlying Omicron uncertainty.
  • Wall Street equities posted net gains as market interest rate speculation was less frantic.
  • US bond yields retreated from peak levels during the day.
  • The dollar lost ground following Powell’s comments with monetary tightening expectations scaled back slightly with the dollar index at 5-week lows.
  • EUR/USD moved above 1.1350 despite mixed ECB rhetoric.
  • Sterling held firm with GBP/USD with fresh 2-month highs above 1.3600.
  • Commodity currencies posted strong gains with higher oil prices and Band of Canada tightening expectations boosting the Canadian dollar.
  • Oil prices posted strong gains on hopes that demand would strengthen later in 2022.
  • Precious metals were boosted by a weaker dollar and lower yields with gold above $1,800 per ounce.
  • Firm risk appetite helped sustain a recovery in bitcoin.

EUR/USD

ECB President Lagarde stated on Tuesday that the bank takes concerns over rising prices very seriously and that people can trust that our commitment to price stability is unwavering. New Bundesbank head Nagel also stated that the inflation surge is not entirely due to temporary factors and that the outlook is extraordinarily uncertain.

ECB chief economist Lane, however, commented that inflation would retreat later this year and be below the central bank’s 2% target in 2023 and 2024. He added that there was no sign of core inflation speeding up in wages settlements and that a rate increase in 2022 remains very improbable.

The US NFIB small-business confidence index strengthened to 98.9 for December from 98.4 previously and slightly above expectations while there was evidence of a marginal decline in inflation pressures. EUR/USD drifted lower into the New York open, although it held above the 1.1300 level as underlying selling remained subdued.

Fed Chair Powell stated that the economy no longer requires an extremely accommodative policy and the central bank will return to a more normal policy with inflationary pressures likely to persist until the middle of this year. There were further expectations of a near-term rate hike in March and at least three increases in 2022.

He added that the Fed will shrink the balance sheet more quickly than last time, although he still expressed caution with comments that a reduction in the balance sheet might start this year. The comments were slightly less hawkish than had been expected following the Fed minutes released last week and the dollar lost ground. Commodity currencies posted net gains with EUR/USD moving above the 1.1350 level.

The latest CPI data will be released on Wednesday and the dollar may strengthen if the headline rate is above 7.0% while a weaker release would curb US support.

The dollar was unable to regain traction ahead of the data and EUR/USD secured a net gain to 1.1375 before stalling with commodity currencies edging higher.

USD/JPY

Atlanta Fed President Bostic stated that there is a risk that inflation will be elevated for an extended period of time and the Fed needs to respond directly, clearly and aggressively. He added that March would be a reasonable time to start hiking rates and he expects at least rate increases this year.

Kansas City Head George stated that it will be appropriate to move earlier on shrinking the balance sheet while Cleveland President Mester commented that she would back a March rate hike to fight inflation. The dollar posted net gains into the New York open with a USD/JPY peak close to 115.70.

Treasuries were marginally higher following Powell’s comments and yields edged lower while equities posted limited net gains with USD/JPY retreating to below 115.50.

Japan’s manufacturing Tankan index retreated to 17 for January from 22 previously, but the non-manufacturing index strengthened to a 23-month high.

China’s CPI inflation rate declined to 1.5% from 2.3% and below market expectations of 1.7% which increased expectations of a central bank interest rate cut and helped underpin risk appetite. Asian equities secured a limited advance and USD/JPY consolidated around 115.35 with EUR/JPY around 131.20.

Sterling

GBP/USD pushed above the 1.3600 in early Europe on Tuesday, but was unable to sustain the move and retreated into the New York open.

Underlying Sterling sentiment held firm on higher money-market yields and hopes that UK coronavirus cases are close to peaking. There has, however, been a strong advance since the beginning of the year and the currency struggled to gain further traction with higher yields seen as priced in.

The on-going difficulties surrounding Prime Minister Johnson had only a limited impact, but political developments will be watched closely amid frenetic speculation.

There was a fresh GBP/USD push to above 1.3600 as the dollar retreated while EUR/GBP was little changed close to 0.8340.

Global risk appetite held steady on Wednesday which helped underpin Sterling and overall currency sentiment held firm. GBP/USD advanced to fresh 2-month highs near 1.3650 before stabilising while EUR/GBP traded below the 0.8350 level.

Swiss franc

The Swiss franc initially remained on the defensive during Tuesday, but it was able to resist further selling pressure with EUR/CHF hitting resistance above the 1.0500 level while USD/CHF was unable to make further headway and retreated to around 0.9240.

The Swiss currency was still hampered by underlying yield trends and expectations that global central banks will raise interest rates this year. EUR/CHF held close to 1.0500 on Wednesday with USD/CHF around 0.9235 as overall risk appetite held steady with markets monitoring yield trends closely.

AUD/USD + USD/CAD

The Australian dollar struggled to make any headway ahead of Tuesday’s New York open, but gradually gained ground and there was fresh momentum as the dollar lost ground following Powell’s comments. In this environment, AUD/USD broke above the 0.7200 level.

Risk appetite held steady on Wednesday, although markets were wary over Chinese coronavirus developments with AUD/USD close to 0.7220 before stalling.

The Canadian dollar was boosted by a weaker US currency and strong gains in oil prices in US trading. USD/CAD retreated sharply to lows around 1.2570.

There were increased expectations that the Bank of Canada would raise interest rates at the January policy meeting with USD/CAD finding support near 1.2550 on Wednesday.

NOK+ SEK

The Norwegian krone drew support from a slid tone surrounding risk appetite and a surge in oil prices with EUR/NOK retreating to below 9.98.

Norwegian mainland GDP data was stronger than expected with EUR/NOK retreating to near 9.96 on Wednesday with USD/NOK near 8.77.

The Swedish krona was able to secure limited gains and EUR/SEK retreated to around 10.28 on Tuesday and a further net retreat to 10.26 on Wednesday as risk appetite held steady with USD/SEK near 9.02.

Equities

After a solid opening, Euro-zone equities were able to make headway on Tuesday despite mixed signals from central bank officials. There was underlying caution, but gains on Wall Street helped pull bourses higher.

Major UK stocks were underpinned by domestic coronavirus hopes while a strong advance in commodity prices also underpinned the UK market. Sterling was little changed and the FTSE 100 index gained 0.6%.

Wall Street stocks drew support from Fed Powell’s comments with a slight scaling back of interest rate expectations. Although there was caution ahead of the inflation data, the S&P 500 index posted a 0.9% gain.

US futures held firm on Wednesday and Asian markets made headway.

Japan’s Nikkei 225 index gained 1.9% with a 0.65% gain for the Australian ASX index as commodity prices held firm.

China’s Shanghai index closed 0.8% high with some relief over the inflation data while Hong Kong’s Hang Seng index traded 2.4% higher in late trading.

Commodities

Oil prices posted strong gains on Tuesday with optimism that the Omicron impact would be short lived and demand would strengthen later in 2022.

Crude was also underpinned by expectations that OPEC+ would keep tight control of markets.

A weaker dollar also provided an element of support and WTI posted strong gains to above $81.0 p/b at the European close.

API data recorded an inventory draw of 1.1mn barrels compared with market expectations of close to 2.0mn.

WTI traded around $81.30 p/b on Wednesday and close to 2-month highs of $81.65 p/b with Brent around $83.60 p/b and also close to 2-month highs.

Precious metals were little changed ahead of the New York open, but then gained ground as the dollar retreated and yields edged lower. Powell’s caution over balance-sheet reduction also helped underpin metals.

Gold posted a strong advance to near $1,820 per ounce with silver advancing to $22.75 per ounce.

Gold was little changed on Wednesday with silver around $22.80 per ounce.

Cryptocurrencies

Cryptocurrencies retreated into Tuesday’s New York open, but then posted solid gains as risk appetite held firm and the dollar lost ground.

The latest data indicated that cryptocurrencies registered record outflows in the first week of 2022 and the fourth successive week of outflows.

Bitcoin was still able to post net gains to above $42,500 as risk appetite held firm. Volatility eased in Asia with bitcoin above $42,500.

Ether also posted a net advance to near $3,250 and held above $3,200 on Wednesday.

Calendar

Major events for the day ahead: (times in GMT)

13.30: US consumer prices

15.00: Fed Governor Brainard speech

15.30: US crude oil inventories