December FOMC Holding Markets Hostage

Weekly Recap

The week kicked off with the Dollar back under selling pressure. On the back of the heavy selling seen across the previous week, dovish comments from Fed vice chair Lael Brainard helped keep USD offered initially. Brainard voiced her support for a smaller hike in December, adding weight to those calling for a Fed pivot following the unexpected drop in October CPI. However, into the middle of the week, USD selling momentum weakened with October retail sales seen coming in above expectations. Added to this, Fed commentary turned more hawkish throughout the week headlined by comments from Fed’s Bullard who called for Fed to raise rates higher than currently projected. Bullard cited the need for rates to hit 5% – 7% in order to calm inflation, well above the Fed’s own current forecasts.

The loss of selling pressure in USD saw equities giving back gains across the week. Having rallied strongly last week and starting this week with a positive tone, most indices were seen falling lower as bond yields began to creep back up. Added to this, concerns over a fresh escalation in the Russia-Ukraine conflict sparked fears of possible NATO involvement when a rocket killing two in Poland was suspected to have come from Russia. 

In FX, GBP was the best performer over the week. Despite UK inflation seen hitting 41 year highs at 11.1%, up 1% from the prior month’s reading markets appear to be reassured by the new UK budget which was delivered on Thursday. The new chancellor has taken a firm line with the economy, outlining £55 billion worth of tax hikes and spending cuts to help bolster government finances while warning that the UK recession will likely last until the end of next year. 

Commodities prices were under pressure this week also. The reversal in risk sentiment was particularly visible in copper and oil prices which both fell sharply over the week. Crude prices, down around 10% as of writing, were weighed upon by the latest OPEC world oil outlook which saw the group slashing its demand forecast for the year ahead, citing huge global uncertainty linked to inflation and supply side constraints. 

Coming Up This Week

RBNZ Rate Hike

Ahead of the RBNZ rates meeting this week expectations have turned firmly hawkish. Traders are looking for the central bank to hike rates by 75bps, which would be the largest hike in RBNZ history, in order to help tame still-rampant inflation. With the latest data showing that inflation is yet to cool, and on the back of hawkish signals from the RBNZ, the market is expecting the bank to take aggressive action, marking a stark contrast between itself and the RBA which has recently pivoted on rates. 

US, EZ & UK PMIs

The latest round of PMI readings this week will be closely watched by markets. Given the growing global recession fears being acknowledged by central banks, this week’s readings will give a timely insight into how the three economies are performing in Q4. Further weakness will no doubt create headwinds for risk sentiment heading into the end of the year. 

FOMC Minutes

With speculation and debate over a potential fed pivot in December gathering greater traction, the latest FOMC minutes this week will be crucial for USD direction ahead of the meeting. The Fed’s language at the last meeting certainly looked a lot more open to the potential for slowing rates down. In light of this, traders will be keen to see how detailed the discussion was and how much support there might be for a pivot in December. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  GBPUSD

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The rally in GBPUSD off the lows has taken price back up to test the pivot we set out the last time we updated this chart. GBPUSD is now at a make-or-break price zone. If bulls can break above the 1.2011 level, the bullish reversal should gather fuller momentum, setting up the way for a higher run towards the bear channel top and 1.4144 in the coming months. However, a failure at this level risks seeing price reverse lower back towards the 1.0494 level in coming months. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with the RBNZ November rates meeting, and November FOMC minutes among other key events and releases. See the calendar below for the full schedule.  

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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters

Original article provided by Trading Writers

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