US Open Note – BoE cheers pound bulls; stocks maintain post-Fed advances 

BoE sends some bullish shockwaves

The Bank of England (BoE) left its policy settings unchanged as expected with a vote of 9-0 to keep interest rates steady at 0.1% on Thursday but provided some hawkish tilts for the pound to distance itself from the key 1.3600 support level and drift above 1.3700 against the US dollar.

The BoE committee judged that despite some uncertainties that remain to be tacked, price developments over the forecast period have strengthened the case for a modest monetary tightening. While that was mostly expected, the central bank strikingly surprised investors by notifying that, if needed, a rate hike would be implemented even before the end of the existing asset purchase program. In other words, it tried to message that it will intervene with a rate hike sooner than previously anticipated if inflation gets out of control in the coming months. But the focus will remain on the unemployment rate, wage growth and supply bottlenecks for further notice.

In other key developments, deputy governor Dave Ramsden joined Michael Saunders in the hawkish camp, voting for a reduction in the asset purchase program from the current amount of 875 billion pounds to 840bln.

Euro/pound resumed its negative momentum after the announcement, tumbling to 0.8538, while pound/yen bounced forcefully above the 200-day simple moving average to top at 150.94, both ignoring the downbeat UK Markit/CIPS PMI data released earlier in the day.

Sticky inflation bothers ECB policymakers

In the Eurozone, sticky inflation is keeping ECB policymakers on their toes as well according to officials, but interestingly, many policymakers are said to be open to a temporary increase in the APP purchases from the current 20 billion euros to 40bln once the PEPP program ends.

The news did not affect the euro much, nor did the lower-than-expected Markit PMI figures, with euro/dollar extending its rebound to an intra-day high of 1.1731.

Dollar index erases post-Fed gains

The US weekly initial jobless claims were shrugged off despite the slight pickup, but the strength in European currencies was enough to force the dollar index to fully retrace its post-Fed upturn and drop back to the 93.00 level. Risk-sensitive currencies such as the loonie, kiwi, and aussie gained the most against the greenback, though dollar/yen could be more interesting to watch as the pair is eagerly fighting for a break above the tough 110.00 resistance area.

With the BoJ expected to be the last central bank to tighten its policy and the Fed providing a clear guidance for its bond tapering plans and boosting confidence that the process could start in November, dollar/yen could extract even more benefits, unless a bigger event upsets global sentiment, shifting funds back to safe havens.

Evergrande worries ease but still well intact

For example, China’s Evergrande could shake global markets in a bad way if it defaults on its debt given that the company is an important issuer of dollar-denominated bonds. But worries took a back seat on Thursday after headlines stated that the government is willing to step in to get things in order. Still, no explicit confirmation has been provided yet, with stock indices trimming gains during late European trading hours.

Nevertheless, the pan-European STOXX 600 index is set to finish the day with some considerable gains, mostly directed by utilities, technology, and real estate shares. Wall Street is aiming to extend yesterday's rebound too.

US Treasury yields were paring earlier advances during the time of writing.


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