Markets hope ECB and BoE will follow the Fed’s dovish lead

• FOMC help drive risk-on sentiment
• BoE and ECB in view, with markets hoping for a similarly dovish assessment
• Energy demand remains weak, with strong US production likely to hamper oil prices

European markets have blasted higher in early trade as traders continue to react off the back of yesterday’s surprisingly dovish take from the FOMC. Coming into the meeting with a substantial gap between the September dot plot and market expectations, there was always a question of whether the Fed planned to adjust towards the market view or seek to reign in expectations over monetary policy next year. Powell’s decision to cut inflation expectations and the outlook for interest rates across 2023, 2024, and 2025 highlighted a bank that is gearing up for a sharp pivot next year. The dramatic nature of this shift can be seen through the adjustment in rate cut expectations for March, which has gone from pricing a 40% chance of a rate cut, to 95%. With the Fed now predicted to cut rates by 150-basis point next year, we have seen a sharp uptick in risk assets and precious metals.

The focus now turns to the Bank of England and European Central Bank, with markets hoping for a similarly upbeat assessment from Lagarde and Bailey. Of the two, it is the ECB which looks best equipped to outline a particularly dovish assessment for 2024, with inflation likely to fall below the 2% target in the lead up to the March meeting. With the eurozone PMI data remaining heavily in contraction territory, and the UK economy having just shrunk 0.3% in October, there will be considerable pressure on the ECB and BoE to outline a pathway back to economic strength as we move forward.

Oil prices look set to remain under pressure if the latest IEA comments are anything to go by, with the group cutting the fourth-quarter demand figure by 400,000 barrels a day. Despite the OPEC efforts to prop up energy markets through the announcement of additional production cuts, the US has embarked on an incredible surge in oil and gas output which saw them gobble up the Saudi’s declining market share. While crude prices are rising at part of a wider risk-on wave today, the overall theme of an oversupplied market and questionable demand outlook should help keep energy prices at bay for the time being.