Dax hits record high, FTSE lags, BoE up next

After a strong handover from Wall Street, Europe is trading mixed as investors weigh up the Fed’s supportive stance against concerns over the covid vaccination programme in Europe.

As expected, the Fed left monetary policy unchanged. The central bank also upwardly revised economic growth forecasts to 6.5% this year, a huge lift from 4.3% previously. Inflation forecasts were also increased to peak at 2.4% this year. Fed Chair Jerome Powell pushed back on rising inflation fears saying he believed this would be a temporary spike that would not alter the Fed’s pledge to keep interest rates at current near-zero levels. Despite the upbeat forecasts, the Fed’s dot plot was more dovish than expected, with the majority of policymakers not expecting to raise interest rates until 2024.

Powell gave stocks a shot in the arm by keeping his cool and committing to maintaining the Fed’s accommodative stance. The S&P 500 and the Dow Jones surged to fresh record highs, with the latter piercing 33,000 for the first time. The prospect of cheap money for longer is a boon for companies.

The Fed-inspired upbeat mood has broadly transferred to Europe, with the EuroStoxx trading 0.3% higher. The Dax is a clear outperformer, powering to a fresh all-time high. Cyclical stocks – those closely tied to the economy’s performance, such as automobiles, banks, miners and travel & leisure – are leading the gains.

The FTSE is lagging behind its peers as vaccine concerns rear their head, and the UK looks in danger of having to relinquish its inoculation crown. The UK, whose vaccine programme had been a success story so far, has run into some obstacles with a shortage now expected from April. Adding to the FTSE’s woes are a stronger pound ahead of the BoE monetary policy announcement at 12:00 GMT.

US futures are pointing to a mixed start as bond yields continue to surge post-Fed. The benchmark US 10-year yield has hit a fresh 13-month high at 1.72% amid fears that a cool Powell will lead to overheating in the economy. Tech stocks are pointing to a lower start on the open while the rotation into value looks set to continue. As such, the Dow is pointing to further gains.

GBP looks to the BoE, USD rises

The Fed will now hand the baton to the BoE, which is also expected to stay put on policy. The UK economy is also on a much firmer footing than it was just three months ago, thanks to a rapid covid vaccine rollout, a better-than-feared Q1 GDP and the Chancellor’s supportive budget.

Investors will be keen to see how the central bank assesses the UK’s economic outlook in light of these latest developments. The BoE’s interpretation of the sudden jump in yields will also be under scrutiny, and we expect the central bank will remain cautious regarding both these interlinked subjects.

BoE Governor Andrew Bailey will be walking a similar tightrope to Jerome Powell – too optimistic and the market could assume that tighter monetary policy is on the cards, sending the pound back through 1.40. Recently Bailey has tried to hold the middle ground, saying he is optimistic but with a hefty dose of caution.

Elsewhere the US dollar is advancing, tracing bond yields higher and paring losses from the previous session. While Fed Powell pledged low for longer and opted to ignore the steepening yield curve, the bond market is convinced it knows better.

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Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.
Sophie Griffiths

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