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Central banks are slowly and at different speeds beginning to dial back their emergency pandemic-era support. This ought to create a bit more FX volatility in the coming months as it plays out and as CBs either do more tightening than they are currently signalling, or a lot less. It’s all about the rate of change of expectations in expectations for CB policy moves.

The Bank of England confounded just about everyone by raising rates. It’s incredibly hard to see how the inflation outlook has deteriorated so much since November, whilst omicron raises near-term uncertainty about the path of the economy. Never mind, the MPC seemed spooked by the CPI numbers this week and hiked. Never mind the fact that they knew in November that this was the likely path for inflation, and had signalled they were likely to move then. Never mind that a 15bps hike to 0.25% is hardly going to tame inflation that will hit 6% – the thinking is one of proving their price stability bona fides more than anything else. We’ll see what the new year brings, but the policy-making looks a bit chaotic.

The move helped sterling with GBPUSD rising to its highest since the start of December, taking the cross firmly towards the middle of the bearish channel it has been tracking since June. But rejection at 1.3370, a key resistance level we’d flagged last week, is important as it suggests this is so far more of a short-term bounce than a complete reversal of the trend. And when we look at the EURGBP cross we can see that actually a lot of the uplift is coming from a weakening dollar. Sellers remain in control but above 1.3370 and it flips.

GBPUSD Chart 17.12.2021

Meanwhile, the European Central Bank yesterday said it will end its Pandemic emergency purchase programme (PEPP) by March 2022, in line with forecasts. It will increase the size of the long-term asset purchase programme (APP) in Q2 and Q3 to bridge the gap. No rate hikes next year is still the message. The Bank of Japan also announced overnight that it will scale back its pandemic-era emergency corporate bond buying programme. Turkey’s central bank is doing other stuff. USDTRY has a 16 handle this morning after the central bank cut rates to 14%.

European stock markets opened broadly lower on Friday morning after a weak session on Wall Street, though the FTSE 100 managed to keep its head above water in early trade. US markets fell abruptly on Thursday with a horrid session for big tech: Apple down 4%, Tesla –5%, Microsoft –3%, Amazon –2.5%, Nvidia off almost 7% and ARKK falling another 4%.

Two-year Treasury yields dropped the most in three weeks and 10s are back to 1.4% as omicron concerns in the US meet a tightening Fed – can the economy handle higher rates? The broad market doing a little better as banks rallied – Dow Jones almost flat whilst the Nasdaq declined 2.5%. The S&P 500 was down 0.87% to erase Wednesday’s Fed relief rally. Maybe quicker pace of tightening is sinking in, or it’s omicron only. If it were the latter, tech would be a safety net. Yields are actually lower, so tech ought to be solid.

These mega cap names have been holding up the entire index for a while –as discussed a few days ago most stocks are well off their all-time highs. Once these last redoubts of safety get blown out we can look for a broad-based rally to take shape but there may be further damage first. A 10% drawdown in the S&P 500 would only take the index back to its October lows. It looks like a very confused picture right now which is going to lead to volatility – macro picture not well understood due to omicron, expect some slowing in economic growth, CBs no longer on side – albeit not exactly going super-hawkish given the inflation levels. All rather messy and indices need the rotation magic to work but index leadership in the US is so concentrated that declines for the mega caps is acutely felt.

As mentioned a couple of weeks ago, the playbook for omicron learnt from delta is for pullback, tentative recovery and then a period of sideways chop and underperformance. Key question for traders right now is whether we get a Santa Rally: my honest opinion is it’s just too hard to make a call on that right now, though seasonality is in its favour.

On the slate today we have the German Ifo business climate survey, final Eurozone CPI figures and the Fed’s Waller speaking.

Gold finally seeing some action – lower rates, weaker dollar – and looks to be in a promising position to mount a rally towards the $1,834 region. Bullish MACD crossover confirmed.

Gold Chart 17.12.2021

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