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Fed overdelivers, will ECB and BoE follow?

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By Craig Erlam  

The most hotly anticipated central bank meeting of the year did not disappoint on Wednesday, with the Federal Reserve potentially delivering this year’s Santa rally.

I don’t think many will have expected the Fed to go as far as it did in forecasting three rate cuts next year, just three months after suggesting the tightening cycle is not over.

Clearly, it’s not just investors who have been impressed with the data we’ve seen so far in the fourth quarter and now they’re getting more carried away than before.

There’s been a lot of debate in recent weeks about whether investors are getting ahead of themselves, too optimistic about how quickly the Fed will cut rates, but the message from the central bank is that is not the case. And in typical fashion, investors have gone further, pricing in six rate cuts next year starting in March.

That’s also forced investors to reassess whether they’re too pessimistic with other central banks too, with the ECB now expected to cut rates by 150 basis points over the next 12 months and the BoE between 100 and 125 basis points.

Both have a lot to live up to on Thursday and Christine Lagarde, in particular, may not be thanking her US counterparts for whipping investors up into a frenzy right before their announcement and press conference. A repeat performance from the ECB could leave investors going into the end of the year in a much more festive mood.

Oil rebounds, demand concerns remain

Even oil managed to join in the celebrations, rallying almost 3% from its lows on Wednesday and it’s adding to those gains on Thursday.

It remains very close to its recent lows, but the prospect of deep rate cuts from central banks next year has boosted the global economic prospects and in turn the price of oil. The question now is whether central banks are responding just in time or whether it will prove to be just too late.

Oil prices over the coming weeks may offer some insight into market expectations on that.

Santa rally for gold?

Gold surged back above $2,000 after the Fed announcement and is once more not too far from the previous record highs.

There’s still some way to go to reach last week’s peak, although that probably wasn’t an accurate reflection of gold sentiment at the time.

A weaker dollar and lower yields, if sustained, could continue to boost gold at a time when traders are feeling much more optimistic. Perhaps gold could enjoy a Santa rally of its own this year.

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.