Dollar up, UK and US PMIs in focus

Despite the Fed’s hawkish stance in recent months, the dollar hasn’t gained much since hitting a 16-month high of 96.94 in late November 2021. However, traders have digested recent FOMC minutes, approaching weekly highs around 96.50.

Trends and momentum dynamics continue to favour the dollar, but prices will have to penetrate the Q4 2021 highs for uptrends to be reasserted in most cases.

Markets sell-off on Fed’s hawkish stance

Stocks fell after minutes from a recent Federal Reserve meeting showed it is ready to aggressively shift away from the central bank’s easy monetary policy.

Wall Street’s major indices fell sharply following the release of the minutes, with the S&P 500 dropping 1.94% to 4,700.58. The Dow Jones Industrial Average fell 392.54 points to 36,407.11, while the tech-heavy Nasdaq Composite dropped 3.34% to 15,100.17.

Markets in Europe are expected to follow their Asian counterparts lower Thursday, following losses in the US during Wednesday’s trading session.

Following the Federal Reserve’s most recent meeting minutes, which showed that the central bank may reduce its balance sheet shortly after raising rates later this year, bonds yields also shot up, putting pressure on equities.

With its tapering of bond purchases now underway, the Fed has already signalled to the market that it will raise rates as soon as it finishes the taper in March. The market is awaiting the Fed’s decision on what it will do with its nearly $9 trillion balance sheet once it is finished increasing it.

According to the minutes, officials are considering shrinking the balance sheet in addition to hiking rates to remove policy accommodation.

In the meeting summary, almost all participants agreed that balance sheet runoff should occur after a first increase in the federal funds rate target range.

Events of today

Later in the day, the UK composite PMI and service PMI will be released. It is widely expected that PMIs have fallen from November’s level to 53.2 in December.

Data releases in Europe on Thursday include German industrial orders for November and eurozone producer prices for the same month.

Investors are keenly watching jobless claims in the US coming in the afternoon and the ISM non-manufacturing PMI for December.