Important Calendar Events
The dollar rose on Thursday, with the dollar index climbing to the 104.5 level. US Treasury yields however remained almost flat, with the US 10-year bond yielding almost 3.7%.
Markets were slow in the past couple of days and ahead of the Christmas holidays, after experiencing heavy volatility earlier in the week. The dollar was boosted on Thursday however, by robust economic data for the US. Final GDP data for the third quarter of 2022 revealed that the US economy is expanding at a higher rate than anticipated. GDP for Q3 rose by 3.2%, against expectations of a 2.9% growth. US Unemployment claims fell below expectations this week, printing at 216K against the 221K predicted.
Last week, FOMC members voted to raise interest rates by another 50 basis points bringing the Fed’s benchmark interest rate in a range of 4.25% to 4.50%. The rate hike was in line with expectations and had already been priced in by markets. US Fed Chair Jerome Powell delivered a hawkish speech after the monetary policy meeting, pointing to further rate hikes.
The interest of market participants is now mostly focused on what lies ahead for the Fed. Cooling price pressures may give the US Federal Reserve some leeway to scale back its interest rate increases in the following year. US economic outlook and inflation will likely determine the pace of rate hikes in 2023.
US inflation cooled in November, with monthly CPI rising by only 0.1%, versus the 0.3% predicted. US headline inflation was 7.1% year-on-year in November, against 7.3% expected and 7.7% in October.
Several important economic activity indicators are due on Friday for the US, including Core Durable Goods Orders, Durable Goods Orders, Personal Income, Personal Spending, New Home Sales, Revised UoM Consumer Sentiment, and Revised UoM Inflation Expectations. More importantly, Core PCE Price Index is also going to be released on Friday, which is the Federal Reserve's primary inflation gauge and may cause some volatility in dollar price.
The Euro dipped on Thursday, with the EUR/USD dropping to the 1.058 level. If the EUR/USD pair declines, it may find support at 1.042 and further down near 1.029. If the currency pair goes up, it may encounter resistance at 1.061 and higher up near 1.078.
The ECB raised interest rates by 50 bp last week, bringing the benchmark interest rate to 2.50%, which was in line with expectations. ECB President Christine Lagarde though, delivered a decisively hawkish speech, stating that interest rates need to rise significantly to combat entrenched Eurozone inflation.
ECB rhetoric remains hawkish this week, pointing to further rate hikes ahead. ECB Vice-President Luis de Guindos stated on Thursday that a 50-bp rate hike may become the new norm for some time. On Monday, de Guindos stressed that the Central Bank is committed to bringing inflation down to its 2% goal and will hike interest rates further. Likewise, ECB’s Nagel reiterated on Tuesday that the ECB is still far off from its inflation goal and needs to be persistent in raising interest rates.
The ECB also revised its inflation forecast for 2022 to reach an average of 8.4%, which was higher than previous forecasts. Soaring EU inflation rates are forcing the ECB to hike rates aggressively to reduce price pressures. Cooling price pressures in the US on the other hand, have trimmed Fed rate hike expectations for 2023. The ECB’s hawkish shift compared to the Fed’s more dovish forward guidance is turning the tide in favor of the Euro.
Final Eurozone inflation reached 10.1% year-on-year in November from an earlier flash estimate of 10.0%. Revised GDP for Q3 of 2022 exceeded expectations, with the Eurozone economy expanding by 0.3% versus the 0.2% predicted. The ECB updated its economic growth forecast by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and 1.8% in 2025. These are lower than previous estimates, indicating that the economic outlook in the Eurozone is poor.
The Sterling retreated against the dollar on Thursday, with GBP/USD dropping to 1.200. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.189 and further down near 1.176.
Economic activity indicators released on Thursday for the UK were overall pessimistic, putting pressure on the Sterling. The current account, which estimates the difference in value between imported and exported goods, services, and income flow exceeded expectations for Q3 of 2022. The current account printed at -19.4B, which is still negative, but less pessimistic than the previous print of -35.1B. GDP on the other hand, fell more than anticipated for the third quarter of the year. Quarterly GDP decreased by 0.3% against expectations of a 0.2% drop. The British economy is shrinking and the country is already in the grip of recession. The BOE recently revised its economic growth projections, with GDP expected to drop by 0.1% in Q4 2022. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down.
The Sterling has been affected this week by what has been perceived as dovish forward guidance by the BOE compared to the Fed and the ECB. BOE members voted to hike rates by 50 bps last week, bringing the BOE’s interest rate to 3.50%, its highest rate in 14 years. The rate hike was in line with expectations, however, and had been fully priced in, putting pressure on the Sterling.
BOE Governor Andrew Bailey delivered a surprisingly dovish speech after the meeting, expressing hope that inflation in the UK would drop, but leaving the door open for further rate hikes. There were also mixed messages from the BOE, with 6 MPC members voting for the 50-bp rate hike, two others to maintain interest at its current rate, and another member in favor of a 75-bp increase.
UK GDP for October showed a 0.5% expansion, versus a 0.4% expected and a 0.6% contraction in September. Annual CPI dropped to 10.7% in November, after hitting a 41-year high of 11.1% in October. Cooling price pressures alleviated some of the pressure on the BOE to raise interest rates.
The Yen traded sideways against the dollar on Thursday, with USD/JPY oscillating around the 132.2 level. If the USD/JPY pair declines, it may find support at 130.4. If the pair climbs, it may find resistance at 139.9 and further up at the psychological level of 142.2.
The BOJ caused a stir in markets on Tuesday by finally yielding to increased price pressures and tilting its monetary policy. Inflation in Japan has gone above the BOJ’s 2% target, putting pressure on businesses and households. In Tuesday’s monetary policy meeting, Japanese policymakers maintained the central bank’s refinancing rate at -0.10%, as expected.
The BOJ however, changed its yield control target for its 10-year government bond to between plus or minus 0.50%, from a previous 0.25%. The BOJ had set a target range around zero for government bond yields for years and this adjustment may be the prelude to a shift towards a more hawkish policy. Long-term, this move may allow interest rates to rise, cutting off some of its monetary stimuli.
BOJ Governor Haruhiko Kuroda issued a press conference after the conclusion of the meeting, which had hawkish undertones, further boosting the Yen. In his speech, Kuroda stated that the BOJ aims to bring inflation back down to the bank’s 2% target. He stressed, however, that an exit from an ultra-easy policy would be premature at this time and this might be achieved only after a certain process. Kuroda is known for his persistently dovish stance and even a slight change in the BOJ’s forward guidance has driven the Yen upwards. In addition, Kuroda is due to retire in April and his successor may decide to unwind the BOJ’s ultra-easy policy.
Price pressures continue to rise in Japan, as annual PPI rose to 9.3% in November, versus the 8.8% predicted. BOJ CPI for October rose to 2.7% on an annual basis, mainly due to the high cost of imported energy.
The final GDP Price Index for the third quarter of the year showed economic contraction by 0.3% on an annual basis and the final quarterly GDP for Q3 of 2022 printed at -0.2%. The Japanese economy shrank in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
The National Core CPI is scheduled to be released on Friday, which may provide key information on Japan’s inflation. The minutes of the latest BOJ Monetary Policy Meeting is also due to be released on Friday and are likely to cause some volatility for the Yen after the meeting’s surprising outcome earlier in the week.
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