Global Markets React to Fed’s Hawkish Stance: Stocks Plunge and Currencies Shift | Daily Market Analysis

Key events:

• Japan - BoJ Interest Rate Decision
• UK - BoE Interest Rate Decision (Dec)
• USA - GDP (QoQ) (Q3)
• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (Dec)
• USA - Existing Home Sales (Nov)

The Dow Jones Industrial Average experienced a dramatic drop of over 1,100 points on Wednesday following the Federal Reserve’s announcement of a 25-basis-point rate cut. While the rate reduction aligned with market expectations, the Fed halved its projected number of rate cuts for next year, dampening investor sentiment. This adjustment spurred a sharp rise in Treasury yields, leading to significant sell-offs across major stock indices.

As the trading session concluded, Dow Jones Futures were down 2.6% or 1,123 points. The S&P 500 and Nasdaq 100 Futures saw steeper declines of 3% and 3.6%, respectively, painting a grim picture of market performance.

In the foreign exchange market, the Japanese Yen hit a one-month low against the US Dollar early Thursday following the Bank of Japan’s decision to maintain its interest rates at current levels. Despite this apparent dovishness, the BoJ projected an uptick in Japan’s Consumer Price Index (CPI) by 2025 and left the door open for potential rate hikes in January or March. This cautious optimism, combined with a broader risk-off sentiment, lent some support to the safe-haven JPY, curbing the USD/JPY pair's upward movement.

The BoJ’s decision was not without debate. The central bank’s policy rate of 0.25% remained unchanged, with eight out of nine board members supporting the move. Board member Naoki Tamura dissented, advocating for a 25-basis-point hike to combat rising inflationary pressures.

Meanwhile, the Australian Dollar initially extended losses after the Fed’s hawkish announcement but pared some of its declines on Thursday. Australia's Consumer Inflation Expectations rose to 4.2% in December from 3.8% in the previous month, marking the highest level since September. However, this surge was insufficient to bolster the AUD significantly, as concerns over the Reserve Bank of Australia’s potential rate cuts weighed heavily on the currency. The RBA is expected to take a data-driven approach in its future decisions, with evolving risks shaping its monetary policy.

The AUD/USD pair continued to struggle as the US Dollar gained strength, bolstered by the Federal Reserve's hawkish outlook. By raising its benchmark rate to a range of 4.25%-4.50%, a two-year low, the Fed signaled its intent to prioritize inflation control, which added upward momentum to the USD.

The British Pound also faced volatility in the aftermath of the Fed’s decision. After dropping over 1% on Wednesday, the GBP/USD pair regained some ground during the Asian session on Thursday, trading near 1.2590. Investors anticipate that the Bank of England will keep interest rates unchanged in its upcoming meeting. However, the BoE’s focus on tackling persistently high inflation in the UK provides support for the Pound.

Economic data released on Wednesday showed the UK CPI rising by 2.6% year-over-year in November, up from October’s 2.3% increase. Core CPI, which excludes volatile food and energy prices, climbed to 3.5% from 3.3% in the previous month. While these figures remain elevated, annual services inflation steadied at 5%, falling short of forecasts but still surpassing the BoE’s target.

In North America, the USD/CAD pair saw a slight retreat after hitting its highest level since March 2020 at 1.4465 during Thursday’s Asian session. Crude oil price gains provided support for the Canadian Dollar, helping the pair pull back to the 1.4430 level. However, the USD/CAD’s downside remains limited, given the USD's strong performance and uncertainties surrounding Canada’s economic policy.

Adding to the CAD’s woes, Canadian Finance Minister Chrystia Freeland resigned earlier this week, citing disagreements with Prime Minister Justin Trudeau over economic strategy. This unexpected development, coupled with the Bank of Canada’s dovish stance, acted as a headwind for the CAD, keeping the USD/CAD pair elevated.

Looking ahead, traders will closely monitor key US economic data for further market direction. The final Q3 GDP figures and weekly jobless claims, due later in the day, are expected to provide short-term catalysts. Attention will also shift to the US Personal Consumption Expenditure (PCE) Price Index, the Federal Reserve’s preferred measure of inflation, set for release on Friday. This data will likely play a significant role in shaping market sentiment and determining the trajectory of the USD in the near term.