The dollar index extended gains above 96.5 on Thursday after reclaiming 1-month highs in the previous session, as the Federal Reserve indicated that it would likely hike interest rates in March and begin reducing its balance sheet soon after. The combined moves will complete a pivot away from pandemic-era easy monetary policy toward an inflation-combatting mode. Markets are pricing in as many as five rate increases this year. The benchmark 10-year US yield also jumped back above 1.8% after the announcement, providing additional support to the dollar. Meanwhile, investors felt that the Fed fell short in providing much needed guidance on the timing and magnitude of the shift in policy, leaving the door open for a slower pace of policy tightening.
European stock futures pointed to a sharp drop at the beginning of Thursday’s session, with most of the gains of the last two sessions expected to be erased, pressured by the hawkish turn in the US Fed’s forward guidance. The central bank signaled it would start raising interest rates in March, while Governor Powell didn’t rule out rate hikes at every single meeting in the future. Meanwhile, the earnings season continues in Europe, with the board of Unicredit approving Q4 and FY2021 results later in the session and French luxury company LVMH posting after markets close. Reporting before the bell, Deutsche Bank posted an unexpected quarterly profit, the sixth in a row, at €145M in Q4, while software firm SAP managed to see full-year EPS rise 3% to €4.46 despite a 30% fall in operating profits to €4,659M.
The Japanese yen extended losses past 114.5 per dollar on Thursday after falling sharply in the previous session, as the US dollar rallied against major peers after the Federal Reserve indicated that it would likely hike interest rates in March and begin reducing its balance sheet soon after. The Japanese currency came under a lot of pressure late last year as major economies signaled readiness to normalize monetary settings, while the Bank of Japan vowed to maintain its ultra-loose monetary policy to achieve its 2% price stability target.
China Stock Market dropped 62 points. Losses were led by Yonyou Soft, Great Wall Motor Co Ltd and Anhui Conch Cement.