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Market Insights

Week ahead: market insights for the 13th of December

Marcodesiac Week Ahead.webp

Markets were extremely worried about US inflation data heading into the end of the week. For once, the forecasters were pretty much spot on, and core inflation printed in line with expectations.

That’s one big risk event navigated without too much drama.Next week’s all about the central banks. We’ll see monetary policy updates from:

  • US Federal Reserve (Weds)
  • European Central Bank (Thurs)
  • Bank Of England (Thurs)
  • Swiss National Bank (Thurs)
  • Norges Bank (Thurs)
  • Bank Of Japan (Fri)

Other key data points to watch this week:

Mon: OPEC Monthly Report Tues: UK Employment, US PPI, Weds: China Retail Sales & Production, UK Inflation, Canada Inflation, US Retail Sales, Thurs: Australian Employment, US Jobless Claims, Philly & Kansas Fed, Fri: German ifo, UK Retail Sales

We’ll also see a host of Flash PMI’s and even more central bank decisions outside of the big guns: Thursday sees Turkey’s latest interest rate decision with the Lira pushing for record lows. Banxico will set Mexico’s interest rate later in the day & Russia’s central bank is expected to hike on Friday.

FOREX
Federal Reserve: Full Speed Ahead?

The Fed has flipped hawkish and now they’re playing catch up. Employment is strong and inflation is running hot, and way above target (although it does seem to be stabilising).

Forward guidance has made their position very clear. A faster taper is on the cards at this meeting. It would be more of a surprise if they DIDN’T announce a faster taper.

This meeting also brings the updated economic projections and the infamous dot plot. Things could get extra spicy on the back of this. If Fed officials are truly worried about inflation next year, the dots will get all of the attention.

Dots.png

Source: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210922.pdf

Each dot represents the view of a Fed policymaker for where the Fed Funds rate should be by the end of each year shown.

At the last meeting, at least 9 of the 18 members saw rate hikes in 2022.

It would be no surprise to see this shift to 18 of 18.

The question has evolved from ‘__Will they hike?__’ to ‘__How many times will they hike?__’ Financial markets are currently pricing roughly three 25bps rate increases next year.

A far more hawkish Fed than expected would likely see a stronger USD. It’s worth noting however that markets have long expected the Fed to be ‘behind the curve’. It’s hard to be sure just how much Fed catch-up is already in the pricing.

Let’s take a look at the EURUSD chart:

gicVS4ju.png

Since the middle of June the pair has maintained a solid downtrend with a very sharp drop last month.

Purely based on price action, it’s looking constructive. After bouncing from 1.12, price rallied to 1.1382 then pulled back, putting in a higher low of 1.1227.

The ECB will have a big say in the direction for this pair at Thursday’s meeting.

Traders await updates on

  1. PEPP: Expected to end this program of asset purchases in March 2022
  2. APP: Expected to continue and increase to smooth the transition away from PEPP
  3. Forward Guidance: Will interest rates rise in 2022?
Bank Of England: Will they finally hike?

Yes! But not yet. (According to a Reuters poll of economists). The BOE was preparing the runway for interest rate hikes until omicron came along and injected some uncertainty. Then MPC member Michael Sauders (who voted for a hike at the last meeting) said he would wait for more details on the new variant… Then the UK government announced Plan B.

So, expectations are very low for the BOE to act this week. Once again, it will probably be a case of what they SAY rather than what they DO.

Before the meeting, the UK will release employment data (Tuesday) & Inflation Data (Wednesday). Just like the Federal Reserve in the US, strong employment and high inflation ratchets up the pressure for rate hikes.

Let’s take a look at GBPJPY:

GdgecpAS.png

Weak bounce from the 148.94 area isn’t exactly inspiring, and weak signals from the Bank of England might be enough to see it break…

But then we have the Bank of Japan to consider. They are unlikely to drastically change their monetary policy at the next meeting.

Without a strong catalyst in either direction, it’s hard to imagine a sustained break below 148.94 or above 152.55.

SNB: Is there a floor?

It’s rare to say, but the Swiss Franc has been very interesting lately. Filling in some background, the Swiss Franc is ALWAYS too strong according to the Swiss central bank.

The SNB regularly intervene in FX markets by selling Francs for Euros and Dollars and are consistently close to being formally labelled currency manipulators by the US treasury.

The Franc has had an exceptionally strong year as the chart shows:

GdgecpAS.png

Traders were surprised a couple of weeks ago when the SNB did nothing to slow the advance through the 1.05 area. Plenty saw the opportunity to get long and front-run the intervention. It didn’t come.

Price continued falling and hit lows of 1.0374 before bouncing. There’s still no real sign of action in the weekly sight deposits either. Recovering the 20 Day Moving Average around the 1.0450 zone could show that the tide is turning.

The focus now shifts to Thursday’s meeting. There are bound to be comments about the recent CHF strength. The question is how determined that message is. Strong rhetoric backed up by an increase in sight deposits could be enough to convince traders not to be against them…

Away from the main central banks, keep half an eye on the Turkish Lira. The Turkish central bank keeps intervening to try and slow the Lira’s slide, and getting nowhere fast. Erdoganomics isn’t going well.

An expected move by the Turkish central bank to cut interest rates yet again (to 14%), even as inflation is running at over 21% could see further outflows and continuing weakness. Turkey’s current situation is a fascinating insight into unconventional monetary policy.

Not investment advice. Past performance does not guarantee or predict future performance.

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