Giles Coghlan LLB, Lth, MA
Financial Source
This week started with a miss in the US CPI data setting hopes for a dovish Fed meeting on Wednesday. However, on Wednesday the Fed’s dot plot projections showed the Fed remains committed to getting on top of US inflation and that a higher rate above 5% may be ahead for 2023. This sent the USD higher, gold lower, and stocks lower. On Thursday the Bank of England’s decision was mixed with a dovish vote split of 7-2, but the BoE no longer sees the current money market pricing as too aggressive, which was more hawkish.
Other key events from the past week
USD: US CPI drops, Dec 13: Headline US inflation came in at 7.1% y/y below the 7.3% forecast and minimum expectations of 7.2%. This sent the S&P500 higher, USD/JPY lower, and precious metals higher before the Fed meeting.
USD: Interest Rate decision, Dec 14: The rate statement took a hawkish outlook with the dot plot median rate for 2023 seen as 5.1% and no rate cuts projected until 2024. However, the bond market did not react in a way that it showed agreement with the Fed’s outlook. A bumpy road ahead for stocks!
GBP: Bank of England, Dec 15: The Bank of England’s decision was mixed with a dovish vote split, but a growing acceptance of the market’s pricing for a 4.50% terminal rate next summer. The hawkish Fed decision may help keep the GBPUSD pressured in the near term, but the inflation battle is far from won.
Key events for the coming week
USD: Consumer confidence, Dec 21: US consumer confidence is forecast by economists to fall to 100 next week down from 100.2 prior. Watch for any big dips in consumer confidence, 98 or below, to potentially weaken US stocks.
Strong Gold seasonals ahead: Gold’s seasonals are great this time of year.
USD: Inflation focus, Dec 23: The last core PCE print came in firm at 5%. Will we start to see PCE, the Fed’s preferred measure of inflation, fall more dramatically? Expect the path of inflation to continue to impact how aggressive the Fed will need to be on its rate path next year.
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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