Markets remain volatile ahead of ECB meeting

Despite the Federal Reserve raising rates as expected, stocks fell on Thursday, as chairman Powell confounded expectations of a less hawkish stance by saying rates would remain higher for a longer period of time.

In response to the Federal Reserve's announcement that it plans to raise interest rates further next year, the dollar strengthened across the board on Thursday ahead of meetings between the Bank of England and the European Central Bank.

Both the euro and sterling fell from six-month highs reached this week, while the dollar rose 0.9% against the Japanese yen to 136.69.

Also, the dollar gained strength against the Swiss franc and Norwegian crown after their respective central banks started off a bumper day of central bank meetings with Swiss rates rising by 50 basis points and Norway's rates rising by 25 basis points, respectively.

Unlike earlier this year, when the Swiss National Bank surprised the market with a 75bp increase, this time it didn't leave a lasting impression on the market for the simple reason that inflation has slowed in the fourth quarter, contrary to the expectations.

Markets expect both the ECB and the Bank of England to raise interest rates by 50 basis points at their meetings later in the day.

With the Fed setting the tone for central bank meetings this week, we expect others to follow suit. The ECB will also provide details on its asset purchases, and the BOE will provide voting breakdowns.

As part of its plan to stop replacing maturing bonds from its 5 trillion euro portfolio, the ECB is expected to reverse years of asset purchases that have made it the largest creditor of many eurozone governments.

BOE makers are expected to split in several directions during their upcoming meeting. There is the possibility of a four-way split in which different policymakers vote for no change or increases of 25, 50, or 75 basis points during the meeting.

Despite signs of slowing inflation, the dollar strengthened after Fed chair Jerome Powell said more increases would come next year and the benchmark overnight interest rate would rise to 5% by 2023.

In the absence of any dial-back in tightening language, the FOMC statement raised hawkish flags.

Consequently, the Fed is not only indicating a higher peak for interest rates, but it is emphasizing the need for rates to remain restrictive for a longer period of time.

In the Asia-Pacific region, data released on Thursday showed China's economy lost more steam in November as factory output slowed and retail sales declined in the month, both of which missed forecasts and clocked their worst readings in six months as a result of the rise in COVID-19 cases hampering the economy.