Citi
European Open
Equity price action was more prominent in the Asian morning, as tech names weighed on local indices. USD tilted a tad lower, while UST yields were a touch higher. The highlight of the morning was the BoJ decision to maintain their rates, but will end emergency purchases of CP and corporate bonds by March 2022 as scheduled. This was a slight hawkish lean as noted by CitiFX Strategist Takashima-san, although JPY did not react to the announcement. High-beta currencies AUD and NZD struggled as equities sagged, although we note that there have been some virus concerns as well.
We look forward to the last set of central bank decisions this week, starting with RUB at 10:30 GMT, and COP at 18:00 GMT. The market forecasts a 100bp hike to 8.5% for the former and Citi Economics forecasts a 50bps hike to 3.0% for the latter. EUR will see Germany PPI 07:00 GMT, followed by Germany IFO Business Climate at 09:00 GMT, while GBP will see Retail Sales data at 07:00 GMT. NOK will sight Unemployment data at 09:00 GMT. We also look forward to the the Fed’s Waller at 18:00GMT today.
A lens on the US
USD tilted slightly lower, as it traded mixed against the G10 complex. UST yields were up slightly across the curve, as noted by our trader Hideyuki Liu in his update below:
–Treasuries are trading close to NY EOD levels, with the curve modestly flatter after the large bull steepening move witnessed over the past two days post-FOMC. Desk flows have skewed to better buying, with RM seen buying long-end. 5y volumes remain outsized, similar to the past few days, indicative of the large recovery of the front-end to intermediate part of the yield curve despite the FOMC meeting projecting three hikes for 2022.
ING
EUR:
The more moderate and less flexible increase in the APP was, in our view, not the biggest hawkish surprise as the ECB left the door open to re-assess the size and pace of tapering. More unexpected was the sharp increase in inflation projections. Yet, President Lagarde seems to have successfully conveyed the message that the ECB will continue to tolerate higher prices in 2022 without any tightening or significant acceleration in tapering. That is key to keeping peripheral spreads in check, but also suggests the ECB won’t close the gap with the Fed in the foreseeable future, which should keep a lid on EUR/USD in the new year.
GBP:
The Bank of England surprised markets and consensus expectations by delivering a 15bp rate hike yesterday. The surprise was surely not due to the rationale behind the decision – we have long highlighted that high inflation and a resilient jobs market were good enough reasons to start tightening – but to the pre-meeting BoE communication, where multiple MPC members appeared to signal the intention to tread cautiously given the Omicron outbreak.
From an FX perspective, this is indeed a welcome development for the pound, as the BoE clearly sent the message that members are ready to act to curb inflation. With the UK fighting one of the worst Covid waves in the developed world, this is indeed set to support GBP as virus-related news will continue to offer a bearish argument in the coming weeks.
The risk in the longer run is that markets may have moved too quickly to price in hikes across the GBP curve – currently, nearly 100bp of tightening are expected for 2022. Our economist expects the BoE to pause in February, with two hikes in May and November. This means that the pound may suffer from some dovish repricing along the way, although that is a story for the new year: for now, virus developments (and in particular whether the UK government will impose new strict restrictions) are set to remain the primary GBP drivers.
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