ECB & Fed Send Markets Crashing With Hawkish Outlook 

Weekly Recap

As we edge ever close to the end of the year, we saw an action-packed week for markets, with the December FOMC, BOE, and ECB meetings headlining the action.
The market was widely expecting the bank to pivot on rates with a smaller 50bps hike ahead of the Fed. However, while the Fed delivered a smaller hike as expected, the new guidance was more hawkish than many anticipated. Initial equities upside was reversed and USD bid as the Fed lifted its peak rate projections for next year, now sitting at 51% from 4.8% prior. With the Fed warning that inflation requires rates to be higher for longer, USD bulls were left short-handed at the back of the meeting.
On Thursday, the BOE kicked off the first of two key central bank meetings. Delivering a smaller 50bps hike as expected, GBP was well sold on the back of the meeting as a 3-way voting split. Some encouraging comments around inflation were taken as a sign that the BOE will likely slow the hiking pace, potentially even pausing, into Q1 next year.
The ECB then took the limelight and rocked markets with an aggressively hawkish outlook. While only delivering the expected 50bps hike, the ECB warned that further significant rate hikes would be needed, alongside upward revisions to its inflation forecasts for next year and the one after. Initial details on QT were also announced, starting at 15 billion EUR per month from March, with further details to follow in February.
Equities markets tanked across the back end of the week as a more hawkish outlook from the Fed and ECB sent bond yields soaring. A negative US retail sales reading on Thursday compounded bearish sentiment in risk assets, underscoring recession fears on the back of a dire global outlook from the ECB, which warned over the looming downside risks next year.

Coming Up This Week

  • December BOJ Meeting 

The upcoming BOJ meeting is widely expected to see the bank reaffirming its commitment to maintaining an easing presence in the market. With many other central banks now pivoting on rates, there is little reason for the bank to shift its stance after sticking to its guns throughout a year which saw massive JPY depreciation. Safe-haven demand is now driving JPY higher into the end of the year and looks likely to continue that way given recent market developments. 

  • CAD CPI 

On the back of the latest BOC meeting which firmly laid the ground for a pause in BOC rate hikes, traders will now be closely watching incoming CPI this week. If inflation was seen lower last month, particularly if we undershoot forecasts, this should see CAD well sold as traders prepare for an unchanged decision in January. On the other hand, should inflation be seen jumping unexpectedly, this will likely see some CAD buying as traders look for a further hike in January. Given that the bank has reached its peak rate target however, it would likely take a meaningful upside surprise to drive any proper CAD buying. 

  • US Core PCE

On the back of the December FOMC, traders will now turn their attention to the latest core PCE data. Given its importance to the Fed as a truer gauge of inflation, the data will be closely watched and taken as a signal as to whether the Fed is likely to continue with a further 50bps hike next meeting or adjust lower still to a smaller 25bps hike. 

Forex Heat Map 

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Technical Analysis

Our favorite technical chart of the week – EURAUD

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The rally higher off the YTD lows has seen the pair breaking through several resistance levels recently. The latest rally has taken price above the 1.5670 level with the market now testing above the bearish trend line from October 2020 highs. Should we close above the trend line this week the near-term view is in favour of a continuation towards the 1.6161 level next. From there, the bullish outlook remains while price holds above 1.5670 with 1.6671 the longer term target. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with the December BOJ as well as CAD CPI & US core PCE 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.

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