ECB To Remain Dovish?

Market participants seems to be having enough of the U.S. dollar rally while the greenback may have reached the peak of its rally.

The Federal Reserve announced that it will double the pace of its taper to $30 billion a month and projected three quarter-point interest rate increases in 2022, another three in 2023 and two more in 2024.  The updated dot plot shows a much more aggressive tightening cycle than envisioned in September when Fed policy makers saw only half a hike.

Despite the Fed’s hawkish turn, the market’s reaction was muted since much of the move was already priced in. We bear in mind that if the demand for dollars is fading, it could mean that a reversal is just around the corner.

Having the Fed behind us, the Bank of England and the European Central Bank will release their respective policy statements today.

The Bank of England surprised markets at its last policy meeting by electing not to raise interest rates despite rampant inflation. The central bank may choose to hold off on a rate hike yet again, as the country struggles with the spread of the Omicron variant. However, rate hikes are just around the corner while the BoE is expected to hike next year.

The European Central Bank was sounding more dovish of late than other central banks. While the ECB may announce an alteration to its pandemic emergency purchase program (PEPP), policymakers may choose to remain dovish as the continent struggles with Omicron. The reemergence of lockdowns and rising infection rates could hamper Eurozone growth, which could force the ECB to remain dovish for the near-term. Economists don’t expect the first rate increase until 2023 at the earliest. Any hawkish surprise today will let the euro fly.

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