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Weekly Market Outlook For December 19th To December 25th

Home >  Weekly Outlook >  Weekly Market Outlook For December 19th To December 25th

Written by:
Myrsini Giannouli

19 December 2022
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Forex 

Important Calendar Events

  • December 19, EUR: German IFO Business Climate, German Buba Monthly Report
  • December 19, GBP: CBI Industrial Order Expectations
  • December 20, JPY: BOJ Policy Rate, Monetary Policy Statement, BOJ Press Conference
  • December 20, EUR: German PPI, German Unemployment Change, Current Account, Consumer Confidence
  • December 20, USD: Building Permits, Housing Starts
  • December 21, JPY: BOJ Core CPI
  • December 21, GBP: Public Sector Net Borrowing, PPI Input, and Output, CBI Realized Sales
  • December 21, USD: Current Account, CB Consumer Confidence, Existing Home Sales, CB Leading Index
  • December 22, GBP: Current Account, Final GDP, Revised Business Investment
  • December 22, USD: Final GDP, Final GDP Price Index, Unemployment Claims
  • December 23, JPY: National Core CPI, Tokyo Core CPI, Monetary Policy Meeting Minutes
  • December 23, USD: Core PCE Price Index, Core Durable Goods Orders, Durable Goods Orders, Personal Income, Personal Spending, New Home Sales, Revised UoM Consumer Sentiment, Revised UoM Inflation Expectations

USD

Cooling price pressures may give the US Federal Reserve some leeway to scale back its interest rate increases in the following year.

The dollar exhibited high volatility in last week’s trading, which was packed with news for the US. The dollar index started the week above the 105 level, dropping near 103.6 mid-week before rallying towards the end of the week and closing at 104.8 on Friday. US Treasury yields followed a similar trajectory, with the US 10-year bond yield dropping from above 3.6% to 3.4% mid-week and then slowly inching higher, rising to 3.5% at the end of the week.

Unexpectedly low US inflation data on Tuesday lowered rate hike odds later in the week, causing the dollar to plummet. Monthly CPI for November rose 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. 

Rate hike expectations for Wednesday’s Fed monetary policy meeting were considerably trimmed after Tuesday’s CPI data. FOMC members, however, voted to raise interest rates by another 50 basis points bringing its 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, causing the dollar to experience a brief surge on Wednesday, before going back down again. US Fed Chair Jerome Powell delivered a hawkish speech after the monetary policy meeting, pointing to further rate hikes. The dollar started to recover towards the end of the week, as markets had time to digest the news. Lower than expected US retail sales and Flash Services PMI data later in the week though kept a lid on the dollar’s ascent.

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. 

In terms of fundamentals, this week has only a few important data coming up ahead of Christmas. The final quarterly GDP on the 22nd may affect the dollar, as it will provide information on the US economic outlook. Core PCE Price Index on the 23rd, the Federal Reserve's primary inflation measure, may also cause some volatility in dollar prices.

TRADE USD PAIRS

EUR 

ECB President Christine Lagarde delivered a decisively hawkish speech, stating that interest rates need to rise significantly to combat entrenched Eurozone inflation.

The Euro edged higher against the dollar in an eventful week for both currencies. The EUR/USD rate was volatile during the week, closing near 1.058 on Friday. 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 on Thursday bringing the benchmark interest rate to 2.50%, which was in line with expectations. ECB President Christine Lagarde delivered a decisively hawkish speech, stating that interest rates need to rise significantly to combat entrenched Eurozone inflation. 

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, however, 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 released on Friday enhanced inflation concerns Final EU CPI was corrected to 10.1% year-on-year in November from an earlier flash estimate of 10.0%. Flash Manufacturing and Services PMI for the Eurozone also exceeded expectations last week, further bolstering the Euro.

Revised GDP for Q3 of 2022 exceeded expectations, with the Eurozone economy expanding by 0.3% versus the 0.2% predicted. The ECB however, 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.

Only minor economic activity indicators are scheduled to be released this week for the EU ahead of the Christmas holidays. Markets will likely still be driven by last week’s news and we may see a trend emerging in EUR/USD.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

BOE members voted to increase interest rates by 50 bps on Thursday, bringing the BOE’s interest rate to 3.50%, its highest rate in 14 years. 

The Sterling, like most major currencies, exhibited high volatility last week. GBP/USD broke through the 1.234 level resistance mid-week climbing to 1.244 but plummeting towards the end of the week, closing near 1.214 on Friday. 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. 

The Sterling was supported by robust economic data early in the week. GDP for October released on Monday showed a 0.5% expansion, versus a 0.4% expected and a 0.6% contraction in September. 

UK inflation fell short of expectations on Wednesday, indicating that price pressures are cooling. Annual CPI dropped to 10.7% in November, after hitting a 41-year high of 11.1% in October. Lower-than-expected headline inflation alleviated some of the pressure on the BOE. 

Accordingly, BOE members voted to increase interest rates by 50 bps on Thursday, 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. 

The BOE also revised its economic growth projections, with GDP expected to drop by 0.1% in Q4 2022 following a decline of 0.5% in Q3. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down.

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. The BOE’s dovish shift caused the Sterling to plummet after the BOE meeting.

Mostly minor economic activity indicators are scheduled to be released this week for the Sterling. Key among those is the Current Account and Final quarterly GDP data on the 22nd.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

BOJ Governor Haruhiko Kuroda is known for his persistently dovish stance and it will be interesting to see if the BOJ will change its forward guidance in the face of rising inflation.

The USD/JPY was driven primarily by the dollar’s movement last week, exhibiting high volatility. The USD/JPY pair dropped to the 134.5 level mid-week but pared losses towards the end of the week, closing near 136.7 on Friday. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 139.9 and further up at the psychological level of 142.2.

Economic activity data released last week for Japan were mostly pessimistic putting pressure on the currency. 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. 

This week, the BOJ monetary policy meeting is scheduled for the 20th and is expected to cause some volatility in Yen's price. Japanese policymakers will announce the central bank’s interest rate, although this is expected to remain unchanged. So far, the BOJ has maintained its ultra-easy monetary policy keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, even as inflation in Japan has gone above the BOJ’s 2.0% target. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down. Market participants will follow closely the BOJ press conference following the conclusion of the policy meeting for hints into the BOJ’s future policy. BOJ Governor Haruhiko Kuroda is known for his persistently dovish stance and it will be interesting to see if the BOJ will change its forward guidance in the face of rising inflation.

USDJPY 1hr chart

TRADE JPY PAIRS

Gold 

Gold prices tumbled on Thursday following the ECB and BOE monetary policy meetings, on increased future rate hike expectations.

Gold prices exhibited high volatility in an eventful week. Gold prices shot up on Tuesday, following the release of US CPI data, testing the $1,810 per ounce resistance. Gold prices plummeted on Thursday though, after a succession of hawkish Central Banks’ policy meetings. If gold prices decline, support may be found near $1,765 per ounce, while resistance may be encountered at$1,784 per ounce and higher up near $1,810 per ounce.

The dollar exhibited high volatility in last week’s trading, with the dollar index starting the week above the 105 level, dropping near 103.6 mid-week before rallying towards the end of the week and closing at 104.8 on Friday. US Treasury yields followed a similar trajectory, with the US 10-year bond yield dropping from above 3.6% to 3.4% mid-week and then slowly inching higher, rising to 3.5% at the end of the week. Gold prices have been affected largely by US treasury yields lately, as these reflect Fed rate hike expectations. Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

Gold prices surged on Tuesday after unexpectedly low US inflation data lowered rate hike odds. US headline inflation printed 7.1% year-on-year in November, against the 7.3% expected and 7.7% in October. The US Federal Reserve raised interest rates by another 50 basis points last Wednesday, bringing its 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 and putting pressure on gold prices. 

Gold prices tumbled on Thursday following the ECB and BOE monetary policy meetings. Both Central Banks raised interest rates by 50 bp, which was in line with expectations. ECB President Christine Lagarde delivered a decisively hawkish speech, stating that interest rates need to rise significantly to combat Eurozone inflation. ECB interest rate raise expectations rose significantly, causing gold prices to plummet.

Markets will still be digesting last week’s major news this week, and the week is light on fundamentals ahead of the Christmas holiday. US PCE data on the 23rd may cause dollar and gold price fluctuations. 

XAUUSD 1hr chart

TRADE GOLD

Oil 

The US Federal Reserve, the ECB, and the BOE raised interest rates last week, reigniting fears that the poor economic outlook and looming recession will reduce oil demand.

Oil prices were volatile last week, with WTI price starting the week at a yearly low close to $70.1 per barrel, climbing to $77.7 per barrel, by mid-week, and finally closing near $74.5 per barrel on Friday. If the WTI price declines, it may encounter support at $62.6 per barrel, while resistance may be found near $82.9 per barrel.

Oil prices were driven by opposing market forces last week. Supply concerns boosted oil prices. A Canadian pipeline at Keystone was shut down after an oil spill and repairs to the pipeline are taking longer than expected, boosting oil prices. 

Further signs of China’s economic reopening increased the oil demand outlook. The Chinese government had eased some of its strident Covid regulations, abandoning its zero-Covid policy. This week, Chinese authorities relaxed even more of the harsh Covid restrictions. The uncertainty over oil demand in China has influenced oil prices considerably as China is the world’s largest energy importer and zero-Covid restrictions severely limit oil demand. 

Global recession concerns put pressure on oil prices, however. The US Federal Reserve, the ECB, and the BOE all raised interest rates last week, reigniting fears that the poor economic outlook and looming recession will reduce oil demand. Even though the rate hikes were already priced in by markets, the ECB delivered a particularly hawkish message pointing to further interest rate increases ahead, driving oil prices down. 

The cap of $60 per barrel set by G7 leaders on Russian oil exports is also expected to limit supply. Russian President Vladimir Putin has threatened to cut production and refuse to sell oil to any country imposing a Russian oil price cap. In addition, OPEC+ will continue oil production cuts into the next year to boost oil prices, curtailing oil supplies by 2 million barrels per day.

WTI 1hr chart

TRADE WTI

Bitcoin and major Cryptocurrencies

The FTX collapse is likely to cause ripples in the crypto industry for some time, as FTX CEO Sam Bankman-Fried was arrested last week in the Bahamas and is facing criminal charges. 

Crypto markets had a volatile week, as news of Sam Bankman-Fried’s indictment was followed by a rapid succession of Central Bank rate hikes. Increased risk aversion sentiment has hit crypto markets hard after the recent collapse of FTX. The FTX token faced liquidity issues, triggering a generalized crypto market sell-off and undermining confidence in the crypto industry. The FTX collapse is likely to cause ripples in the crypto industry for some time, as FTX CEO Sam Bankman-Fried was arrested last week in the Bahamas and is facing criminal charges. 

Cooling US inflation at the beginning of the week trimmed Fed rate hike bets, boosting risk sentiment and cryptocurrency prices up. Renewed risk sentiment provides support for risk assets, such as cryptocurrencies. Risk sentiment was also increased by signs of China’s economic reopening at the beginning of the week. The Chinese government has eased some of its strident Covid regulations last week, abandoning its zero-Covid policy. On Monday, Chinese authorities relaxed even more of the harsh Covid restrictions. 

Three major Central Banks, the Fed, the ECB, and the BOE raised interest rates last week, reigniting global recession concerns and driving risk sentiment down. Even though the rate hikes were already priced in by markets, the ECB delivered a particularly hawkish message pointing to further interest rate increases ahead.

Bitcoin prices spiked above the $18,150 level resistance mid-week but pared gains later in the week plummeting to $16,700, testing the support at this level during the weekend. If the BTC price declines, further support can be found near $16,000, while resistance may be encountered at $17,400. 

Ethereum price also shot up mid-week, testing the resistance near $1,350 but fell sharply later in the week, dropping to $1,160. If Ethereum's price declines, it may encounter support at $1,150, while if it increases, resistance may be encountered near $1,350.

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

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Written by:
Myrsini Giannouli

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