USD Falls as FOMC Support Smaller December Hike

Weekly Recap

Another week comes to a close in financial markets and as we edge closer still to the final month of the year we’ve seen plenty of further important developments this week. The FOMC minutes, updates from the OECD, and changes in the Covid outlook in China have each played a key part in shaping the price action we’ve seen this week. 

The US Dollar came under fresh selling pressure this week as a dovish set of FOMC minutes gave greater weight to the growing market expectation that the Fed will opt for a smaller hike at the December FOMC. On the back of the drop in October CPI, the minutes confirmed that Fed members agreed a slower pace of hikes would soon be appropriate. While the December meeting wasn’t mentioned specifically, comments from certain Fed members recently calling for a smaller hike in December, combined with the minutes, have fuelled a further unwinding of USD longs. 

The GBP rally continued to be the hottest move in FX this week. GBP continued to gain despite the OECD issuing fresh warnings over the UK economy which it forecasts is facing a recession the rest of the G7 will avoid. Due to a combination of idiosyncratic factors involving Brexit, the OECD warns that the UK is likely to be the second weakest developed economy next year. Still, with the political landscape looking much more stable under new PM Sunak and with the new chancellor having laid out a more credible autumn budget, GBP continues to find strength here. 

While risk sentiment was helped across the week by the fresh downside in USD, there are growing downside risk factors causing some uncertainty. Chief among these factors is the Covid outlook in China. News of fresh lockdowns in the Zhengzhou province in response to soaring Covid cases has deflated the optimism that was building around the China reopening story. With the risk of lockdowns (initially slated as 5 days) being extended in duration and or expanded in scope, there is a sense of caution particularly with cases likely to increase further over winter. 

Coming Up This Week

  • US Prelim GDP 

A key week for US data kicks off with the advanced GDP reading on Wednesday. Given that a key aspect of the argument for a smaller rate hike is the impact that Fed tightening is having on the economy, this latest GDP reading will be closely watched. If we see any weakness in the data this will no doubt be seen as strengthening the chances of a smaller hike in December, dragging USD lower. However, should data surprise to the upside, this might give the Fed some scope to keep rate increases at a larger level for longer, driving USD higher. 

  • OPEC Meetings

The latest OPEC meeting this week will be keenly watched on the back of the volatility we saw in oil markets last week. Rumours of a potential news OPEC production hike saw oil prices crashing to January lows before reversing higher as Saudi Arabia denied the news. Indeed, with the group having recently announced fresh production cuts and prices still not rising, risks appear more likely skewed towards further production cuts which would drive oil higher if announced this week. 

  • US Labour reports (NFP)

On Friday we have the headline data event of the week, with the latest US labour reports due. The market is looking for the NFP to print 200k from 261k prior, the unemployment rate to hold at 3.7%, and average hourly earnings to move to 0.3$ from 0.4%. Keep a close eye on the earnings data because they will be key for gauging the upcoming inflation report. If we see any strength in earnings this might pave the way for fresh upside in inflation while any surprise downside will be seen as increasing the chances of a further drop in CPI ahead of the December FOMC meeting. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  GBPCAD

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The rally off the YTD lows in GBPCAD has seen the market breaking back above several key resistance levels, now turned support. Price is currently retesting the underside of the broken bear channel. While price holds above the 1.5886 level the focus is on a continued push higher towards the 1.6590 level ahead of the bear channel top above. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with US advanced GDP, US PCE, OPEC meetings and the US NFP 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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