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Weekly Market Outlook For December 5th To December 11th

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Written by:
Myrsini Giannouli

06 December 2022
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Forex 

Important Calendar Events

  • December 5, EUR: ECB President Lagarde Speech, French, Italian, German and Spanish Services PMI, Eurozone Services PMI Retail Sales, Eurogroup Meetings
  • December 5, GBP: UK Final Services PMI
  • December 5, USD: US Final Services PMI, ISM Services PMI, Factory Orders
  • December 6, JPY: Average Cash Earnings, Household Spending
  • December 6, GPB: BRC Retail Sales Monitor, Construction PMI
  • December 7, JPY: Leading Indicators
  • December 7, EUR: German Industrial Production, French Trade Balance, Italian Retail Sales, Final Employment Change, Revised GDP
  • December 7, USD: Revised Nonfarm Productivity, Revised Unit Labour Costs, Crude Oil Inventories, Consumer Credit
  • December 8, JPY: Bank Lending, Current Account, Final GDP Price Index, Final GDP
  • December 8, EUR: ECB President Lagarde Speech
  • December 8, USD: Unemployment Claims
  • December 9, EUR: ECOFIN Meetings
  • December 9, GBP: Consumer Inflation Expectations
  • December 9, USD: PPI and Core PPI, Preliminary UoM Consumer Sentiment, Preliminary UoM Inflation Expectation, Final Wholesale Inventories

USD

Fed Chair Jerome Powell delivered an unexpectedly dovish speech stating that he sees rate hikes slowing down as soon as December.

The dollar started last week with modest gains, with the dollar index rising just above the 107 level. The dollar plummeted towards the end of the week and the dollar index dropped to its lowest level since June, closing at 104.5 on Friday. US Treasury yields were also volatile last week, with the US 10-year bond yielding close to 3.8% mid-week, but dropping sharply and ending the week just below 3.5%.

Expectations of easing Covid-restrictions in China boosted risk sentiment last week, putting pressure on the safe-haven dollar.

Fed rhetoric was cautiously hawkish at the beginning of last week, but Fed Chair Jerome Powell delivered an unexpectedly dovish speech on Wednesday, pushing the dollar down. Powell stated that he sees rate hikes slowing down as soon as December.
The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

Market expectations of future rate hikes were considerably trimmed in the past couple of weeks on cooling US inflation. Last week, the Core PCE price index, which is the Fed’s preferred inflation gauge, fell below expectations. Core PCE in October rose by just 0.2% against expectations of a 0.3% growth and a 0.5% growth in September. Annual PCE printed at 6.0% in October versus 6.3% in September, putting pressure on the dollar. US CPI and PPI inflation data in October released in the past few weeks also fell below expectations, indicating that inflation is cooling faster than expected, with annual CPI printing at 7.7%, compared to 8.2% in September and 7.9% expected.

On the data front, the US CB Consumer Confidence dropped to 100.2 in November from 102.2 in October, against expectations of 100.0. Slowing economic activity in the US is pushing the dollar down. Preliminary GDP data for the year's third quarter exceeded expectations, rising to 2.9% from 2.6%, indicating that the US economic outlook is improving.

The US jobs sector is showing signs of expansion, as JOLTS jobs openings climbed to 10.33M in October from 10.69M the previous month. November Non-farm payrolls showed that 263K jobs were added to the US economy, beating expectations of 200K. Average hourly earnings grew by 0.6%, twice as much as the expected 0.3%. Strong GDP and labor data may encourage the Fed to keep raising interest rates based on a strong economic background.

Key fundamental indicators coming up this week for the dollar, include the ISM Services PMI data on the 5th and the PPI inflation data on the 9th. Traders will also pay close attention to Fed rhetoric this week, ahead of the central bank’s next monetary policy meeting on the 14th.

TRADE USD PAIRS

EUR 

Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October.

The Euro gained strength last week, benefitting from the dollar’s weakness. EUR/USD went above the 1.036 level resistance mid-week, closing near 1.054 on Friday. If the EUR/USD pair declines, it may find support at the parity level and further down near 0.973. If the currency pair goes up, it may encounter resistance at 1.061.

ECB rhetoric remained hawkish last week. ECB’s de Cos was aggressively hawkish, stating that Hikes so far are not enough to return inflation to the ECB’s goal. ECB President Christine Lagarde reiterated the need to bring Eurozone inflation down but stressed that how far and how quickly rates must rise will be determined by several factors. 

In its latest monetary policy meeting, the ECB raised its interest rate by 75 basis points to 1.5%, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Market odds are currently in favor of a 50-bps rate hike at the ECB’s next monetary policy meeting. 

Eurozone headline inflation showed signs of cooling in November, after hitting an all-time high in October. Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October, against expectations of a 10.4% print. Core EU CPI, which excludes food and energy, remained steady at 5.0% on an annual basis. Eurozone PPI inflation data released last week reinforced the notion that Eurozone prices are easing. The monthly Producer Price index slowed by 2.9% in October, against expectations of a 2.0% drop and a 1.6% growth in September.

Eurozone economic outlook is poor, showing signs that the EU is entering a recession, limiting the ECB’s ability to raise interest rates. Eurozone GDP grew by 0.2% in the third quarter of 2022 as expected. Economic expansion is slowing down, following a 0.7% GDP growth in the second quarter. Analysts are predicting stagnation later this year and in the first quarter of 2023. Stagflation becomes a real headache for the ECB, which will be forced to battle inflation without the support of a robust economic background.

This week, Eurogroup and ECOFIN meetings on the 5th and the 6th respectively may cause some volatility in Euro price. Other noteworthy Euro events include ECB President Lagarde’s speeches scheduled on the 5th and the 8th.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP

BOE Governor Andrew Bailey addressed the House of Lords on Tuesday in a speech that was less hawkish than expected, pointing to a slowing pace of rate hikes.

The Sterling gained strength last week, with the GBP/USD rate climbing above the 1.202 level resistance mid-week and testing the 1.228 level resistance at the week’s end. If the GBP/USD rate goes up, it may encounter resistance at 1.267, while support may be found near 1.176 and further down near 1.035. Risk sentiment was renewed on Tuesday, benefitting riskier assets, such as the Sterling.

BOE Governor Andrew Bailey addressed the House of Lords on Tuesday in a speech that was less hawkish than expected, driving the Sterling down. Even though Bailey stated that the BOE was likely to continue raising interest rates, his stance was more moderate than expected, pointing to a slowing pace of rate hikes.

Political developments in the UK have put pressure on the Pound once more. Deputy prime minister Dominic Raab is being investigated after complaints surfaced that he has breached the ministerial code. An independent investigation has been launched into the actions of the Deputy Prime Minister and prime minister Rishi Sunak will eventually deliver judgment on Raab’s conduct.

UK inflation hit a 41-year high in October, as annual CPI climbed to 11.1%, its highest value since 1981. October’s inflation exceeded September’s print of 10.1% and expectations of 10.7%. Inflation in the UK continues to rise, mainly due to the high cost of energy. Annual core CPI, which excludes food and energy, printed at 6.5%, exceeding expectations of 6.4%. Rising UK inflation is forcing the BOE to make some tough choices against a weak economic backdrop.

The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. UK monthly GDP for September dropped by 0.6%, against expectations of a more modest, 0.4% drop, indicating that the country is already in the grip of recession. Quarterly preliminary GDP for the third quarter of 2022 also came out negative, printing at -0.2%, compared to a 0.2% growth in the second quarter. The BOE predicts that the recession could last for almost two years, with expansion not expected again till mid-2024.

At the latest monetary policy meeting, BOE members voted to increase interest rates by 75 bps. Currently, the BOE’s interest rate is at 3.0% and the difference with the Fed’s rate of 4.0% is putting pressure on the Sterling. The BOE will also be introducing another round of gilt sales this month, as they shrink their balance sheets.

Only minor economic activity indicators are scheduled to be released this week for the UK, which is not expected to have a big impact on the Sterling. MPC members’ speeches may affect the Sterling in the coming weeks, ahead of the BOE monetary policy meeting on the 15th.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY

BOJ rhetoric remained dovish, with BOJ board member Tamura reiterating the need to continue the central bank’s ultra-loose policy to support the economy.

The Yen gained strength last week, reaching a three-month high against the dollar. The USD/JPY pair traded sideways at the start of the week but plummeted mid-week, dropping below the 137.5 level support and closing near 134.3 on Friday. If the USD/JPY pair declines, it may find support at 130.4. If the pair climbs, it may find resistance at 142.2 and further up at the psychological level of 145.0.

BOJ rhetoric last week remained dovish, with BOJ board member Tamura reiterating the need to continue the central bank’s ultra-loose policy to support the economy. Bank of Japan Governor Haruhiko Kuroda stated on Friday that policymakers should offer clear communication on their economic policies to markets and added that BOE is likely to achieve its inflationary target within 2023.

Economic activity indicators released last week for Japan were disappointing, putting pressure on the currency. Consumer confidence declined in November, dropping to 28.6 from 29.9 in October, against expectations of an increase to 30.0. Monetary based declined by 6.4% in November versus the 4.5% decrease expected. 

In its latest policy meeting, the BOJ left its monetary policy unchanged, as expected. The BOJ maintained its ultra-easy monetary policy keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down. 

BOJ CPI for October rose to 2.7% on an annual basis, against 2.0% in September and 2.2% predicted. Hotter than expected inflation in Japan is mainly due to the high cost of imported energy. National Core CPI data also indicated that inflation in Japan continues to rise. National CPI rose by 3.6% year-on-year in October, beating expectations of a 3.5% rise. October’s data are much higher than September’s 3.0% print, indicating that price pressures continue to rise in Japan. 

Recent preliminary GDP data were disappointing, showing that Japan’s economy shrank in the third quarter of 2022 by 0.3%, against expectations of growth of 0.3% and 0.9% growth in the previous quarter. The annual Preliminary GDP Price Index printed at -0.5%, indicating that the Japanese economy is contracting, 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.

Key economic activity data due this week for Japan, include Leading Indicators on the 7th and GDP data on the 8th.

USDJPY 1hr chart

TRADE JPY PAIRS

Gold 

Gold prices edged higher last week under diminished expectations of rate hikes, as US inflation cooled.

Gold prices skyrocketed last week, touching a 4-month high, as the dollar plummeted. Gold went above the $1,785 per ounce resistance mid-week, testing the $1,802 per ounce towards the end of the week. If gold prices decline, support may be found near $1,666 per ounce and further down at $1,703 per ounce, while resistance may be found at $1,877 per ounce.

The dollar started last week with modest gains, with the dollar index rising just above the 107 level. The dollar plummeted towards the end of the week though, and the dollar index dropped to its lowest level since June, closing at 104.5 on Friday. US Treasury yields were also volatile last week, with the US 10-year bond yielding close to 3.8% mid-week, but dropping sharply and ending the week just below 3.5%.

Fed rhetoric started cautiously hawkish last week, but Fed Chair Powell delivered an unexpectedly dovish speech on Wednesday, pushing the dollar down and boosting gold prices. Powell stated that he sees rate hikes slowing down as soon as December.

Market expectations of future rate hikes were considerably trimmed in the past couple of weeks on cooling US inflation. Last week, the Core PCE price index, which is the Fed’s preferred inflation gauge, fell below expectations. Core PCE in October rose by just 0.2% against expectations of a 0.3% growth and a 0.5% growth in September. US CPI and PPI inflation data in October released in the past few weeks also fell below expectations, indicating that inflation is cooling faster than expected, with annual CPI printing at 7.7%, compared to 8.2% in September and 7.9% expected.

Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Gold prices edged higher under diminished expectations of rate hikes. 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.

XAUUSD 1hr chart

TRADE GOLD

Oil 

The cap on Russian oil might limit supply, especially if Russia decides to retaliate by refusing to trade with countries that enforce the price limit.

Oil prices rose last week on expectations of easing China Covid measures and a price cap set on Russian oil exports. Oil prices went up, with WTI price climbing to the $80.5 per barrel level. 

Covid cases in China have finally started to drop, boosting the oil demand outlook and oil prices. After days of protests against the crippling Covid lockdowns, Chinese authorities finally seem ready to relax some of the harsh Covid restrictions. The Chinese government eased some of its strident Covid regulations, abandoning its zero-Covid policy. 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. 

G7 leaders have finally decided on the Russian oil cap. G7 nations originally considered a price cap on Russian oil in the range of $65 - $70 per barrel, which is above the current market level. Such a price cap would not hinder the trading of Russian oil, making this sanction against Russia a little more than a gesture. Poland however, was pressuring for a drastically lower $30 per barrel price cap. G7 leaders reached an agreement to enforce a price cap of $60 per barrel, which is slightly lower than the current market level. The cap on Russian oil might limit supply, especially if Russia decides to retaliate by refusing to trade with countries that enforce the price limit.

OPEC and OPEC-JMMC Meetings were conducted on Sunday. OPEC+ members agreed to continue oil production cuts into the next year to boost oil prices. The organization decided to curtail oil supplies by 2 million barrels per day, maintaining its previous decision made in October. OPEC’s oil production cuts are set to run throughout 2023, although the group stated that they would address market developments if necessary.

WTI 1hr chart

TRADE WTI

Bitcoin and major Cryptocurrencies 

Risk sentiment was renewed last week and crypto markets edged higher as China's concerns started to ease.

Risk sentiment was renewed last week as China's concerns started to ease. Crypto markets and stock markets edged higher in hopes of China’s economic recovery. After days of protests against the crippling Covid lockdowns, Chinese authorities finally seem ready to relax some of the harsh Covid restrictions. The Chinese government eased some of its strident Covid regulations, abandoning its zero-Covid policy. 

Bitcoin price climbed to the $17,000 level during the week as risk sentiment improved, testing the resistance at $17,100 during the weekend. If BTC declines, support can be found near $15,500, while further resistance may be encountered at $18,150. 

Ethereum price rose above $1,200 last week, touching $1,300 over the weekend. If Ethereum's price declines, it may encounter support at $1,072 and further down at the psychological level of $1,000, while if it increases, resistance may be encountered near $1,350.

Market expectations of future rate hikes were considerably trimmed after recent US inflation data showed that inflation is cooling at a faster rate than expected. Reduced rate hike expectations diminish global recession concerns, boosting risk sentiment. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

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.

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

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