Important calendar events
The dollar was volatile last week, gaining strength mid-week on robust US fundamentals, with the dollar index rising to the 103.7 level. The dollar dropped sharply on Friday, however, after Fed Chair Jerome Powell delivered a dovish speech and the dollar index closed near 103.2 on Friday. US treasury yields also rallied mid-week, with the US 10-year bond yielding approximately 4.35%. Expectations of a dovish pivot in the Fed’s policy, however, drove treasury yields down on Friday and the US 10-year bond yield dropped to 4.20%.
The dollar was under pressure last week, as the Federal Reserve seems to have completed its hiking cycle. The Fed was in focus last week, with several policymakers delivering speeches throughout the week. On Tuesday, FOMC member Christopher Waller hinted at possible rate cuts in the months ahead. US policymakers seem to be divided, however, as Fed’s Mary Daly stated that the central bank is not yet considering slashing borrowing costs. Fed chair Jerome Powell delivered a speech on Friday that was more dovish than expected, driving the dollar down. Powell emphasized that it would be premature to talk about rate cuts but hinted that the central bank has reached its rate ceiling.
At the latest Fed meeting in November, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. The Fed has made it clear that its approach from now on will be data-driven. Markets are always ahead of events and are already pricing at an end to the Fed’s tightening policy. Market odds of another rate hike in December have dropped to zero, while markets are pricing in over 50% probability of a 25-base point rate cut in March.
The Fed’s hawkish stance over the past year has been paying off and US price pressures are cooling. Inflation in the US eased more than expected in October, driving down rate hike expectations and putting pressure on the dollar.
Headline inflation rose by 3.2% year-on-year in October from a 3.7% reading in September and against expectations of a 3.3% print. Monthly CPI remained unchanged from the previous month in October, while markets were anticipating a 0.1% raise. Core CPI, which excludes food and energy, also surprised on the downside.
Core PCE price index data on Thursday confirmed that price pressures in the US are cooling. This is the Federal Reserve’s preferred inflation gauge. Core PCE price index rose by only 0.2% in October from a 0.3% growth in September. Thursday’s core PCE data were in line with expectations indicating that US inflation is easing.
US Preliminary GDP on Wednesday exceeded expectations boosting the dollar. Preliminary GDP showed that the US economy expanded by 5.2% in the third quarter of 2023, against expectations of a 5.0% growth and surpassing by far the 2.1% growth of Q2. The US economy seems to be recovering, putting recession fears to rest. Advance GDP data for the third quarter of 2023, which had been released a month earlier, had shown that the US economy expanded by 4.9%, but Thursday’s print showed that the US economy is expanding at a faster pace than anticipated. Preliminary GDP price index for the 3rd quarter of the year reached 3.6%, which was only marginally higher than the 3.5% advance GDP price index released last month.
US Consumer confidence in November rose above expectations. CB Consumer Confidence is a leading indicator of economic activity and health, and an accelerating print shows an optimistic economic outlook. The composite index rose to the 102.0 level in November from 99.1 in October, against expectations of 101.0.
US fundamentals are especially important this coming week, ahead of the Fed rate decision on the 13th. US Labor data, in particular, are front and center in the news. This week’s labor data are critical in assessing how much tightening the US economy can withstand.
JOLTS Job Openings on Tuesday, reflect the number of new positions opening in the US. ADP Non-Farm Employment data on Wednesday show the change in the number of employed people, excluding the farming industry. US Unemployment Claims on Thursday indicate the number of people filling for unemployment. Friday’s US labor data are of primary importance. The US unemployment rate is due on Friday, as well as Average hourly earnings, which provide a first measure of consumer inflation. The most important indicator coming up on Friday is Non-Farm Employment Change, which measures the number of jobs added to the US economy.
EUR/USD was mostly directed by the dollar’s trajectory last week. The currency rate dipped below the 1.083 level but recovered a little on Friday, closing near 1.089. If the EUR/USD pair declines, it may find support at 1.083, while resistance may be encountered near 1.101.
Inflation data for some of the Eurozone’s leading economies on Wednesday surprised on the downside. German Preliminary CPI declined by 0.4% in November against expectations of a 0.1% drop. Headline Spanish inflation cooled to 3.2% year-on-year in November from 3.5% in October against expectations of a much higher, 3.6% print. Wednesday’s CPI data showed that price pressures are easing in some of the Eurozone’s leading economies.
EU CPI and Core CPI data on Thursday showed that price pressures in the EU are cooling and this will likely play a decisive role in the ECB’s future policy. Headline inflation in the Eurozone dropped to 2.4% year-on-year in November, its lowest level since July 2021, from 2.9% in October. Core CPI, which excludes food and energy, eased to 3.6% year-on-year in November from 4.2% in October.
The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth. Disinflation seems to be well underway in the EU, increasing the odds of a dovish pivot in the ECB’s monetary policy.
The ECB decided to keep its benchmark interest rates unchanged at 4.50% in October. Markets anticipate that the ECB has hit its rate ceiling, putting pressure on the Euro. The ECB is tasked with assessing the risk to the fragile Eurozone economy against high inflation rates.
ECB President Christine Lagarde has hinted at an end to rate hikes. Lagarde has highlighted the risks to the Eurozone economy stressing that the economy is likely to remain weak for the remainder of the year. Lagarde has also repeatedly stated that it is too early to talk about rate cuts and warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
In her testimony at the Committee on Economic and Monetary Affairs of the European Parliament, in Brussels on Monday, Lagarde maintained her cautious stance. Lagarde stated that the fight against inflation is progressing but it is not over yet, signaling steady policy over the next few months.
The economic outlook of the Eurozone is deteriorating, putting pressure on the Euro. Flash GDP data for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
GBP/USD edged higher last week, rising to the 1.271 level. If the GBP/USD rate goes up, it may encounter resistance near 1.280, while support may be found near 1.244.
British Prime Minister Rishi Sunak announced on Monday a bundle of foreign investments in Britain ahead of a gathering of business leaders later in the week. British finance minister Jeremy Hunt released last week the Autumn update on the British budget. Hunt announced tax cuts in an attempt to stimulate the stagnant economy. The latest budget update included a forecast of higher government debt issuance, which boosted the Sterling.
BOE Governor Andrew Bailey has warned that inflation risks may need more aggressive action and stressed that the BOE will be holding interest rates in restrictive territory long enough to see inflation down to the bank’s 2% target.
In an interview on Monday, Bailey appeared to be more hawkish than anticipated, propping up the Sterling. Bailey stressed that getting inflation back down to the BOE’s 2% target will take time. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation. BOE Deputy Governor Dave Ramsden expressed a similar opinion on Tuesday, stating that monetary policy would need to remain restrictive for some time to defeat inflation.
The BOE maintained its official rate at 5.25% at its latest meeting, which was in line with expectations. The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down.
On the data front, Net Lending to Individuals data showed that British consumers increased the pace of their borrowing by 1.2B in the 12 months to October, the most in five years. The number of Mortgage Approvals also went up by 47K in October from 44K in September.
CPI data showed that British inflation cooled more than forecast in October, reinforcing expectations that the Bank of England has ended its hiking cycle and will be cutting interest rates by the middle of next year. Headline inflation in the UK rose by 4.6% year-on-year in October, registering a dramatic drop from September’s 6.7% increase. Annual Core CPI, which excludes food and energy, grew by 5.7% in October versus 6.1% in September and 5.8% forecast.
Recent fundamentals have shown that the British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Prolonged tightening has taken its toll on the labor market and other vital economic sectors.
UK GDP data revealed that the British economy remained stagnant during the third quarter of 2023. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter. Economic growth is slowing down in the UK and the country is on the brink of recession.
A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession.
The Yen benefitted from the dollar’s decline last week, and the USD/JPY dropped to the 146.8 level. If the USD/JPY pair declines, it may find support near 145.9. If the pair climbs, it may find resistance at 149.7.
The Fed’s hawkish policy seems to be gradually coming to an end, relieving some of the pressure on the Yen, which has been weakened by the BOJ’s dovish policy. The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels.
The BOJ maintained its short-term interest rate target steady at -0.10% and that for the 10-year government bond yield around 0% set under its yield curve control, but redefined the 1.0% limit as a less restrictive ceiling rather than a rigid cap. Even though the BOJ tweaked its yield curve control policy slightly, markets were expecting a bigger shift in policy, and the Yen plummeted after the interest rate announcement.
Preliminary GDP data showed that Japan's economy contracted in the third quarter of the year. The world's third-largest economy contracted by 0.5% in the third quarter against estimates of a 0.1% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Preliminary GDP Price Index showed a 5.1% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy.
National Core CPI, which excludes food and energy, continued to accelerate in October increasing the odds that the BOJ will soon end its ultra-accommodating policy. National Core CPI rose by 2.9% year-on-year in October from 2.8% in September against expectations of a 3.0% print. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI fell short of expectations on Tuesday but remained firmly above the central bank’s target. BOJ Core CPI dropped to 3.0% year-on-year in October from 3.4% in September, against expectations of a 3.4% print.
Gold prices surged last week, climbing to $2,072 per ounce, as the US dollar and treasury yields gained strength. If gold prices increase, resistance may be encountered near $2,076 per ounce, while if gold prices decline, support may be found near $1,984 per ounce.
Gold prices rose for the third week in a row, as expectations of a dovish Fed pivot drove the US dollar and treasury yields down. Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises.
The dollar was volatile last week, gaining strength mid-week on robust US fundamentals, with the dollar index rising to the 103.7 level. The dollar dropped sharply on Friday, however, after Fed Chair Jerome Powell delivered a dovish speech and the dollar index closed near 103.2 on Friday. US treasury yields also rallied mid-week, with the US 10-year bond yielding approximately 4.35%. Increased expectations that the Fed has reached its rate ceiling, however, drove treasury yields down on Friday and the US 10-year bond yield dropped to 4.20%.
Inflation in the US eased more than expected in October, driving down rate hike expectations and boosting gold prices. Headline inflation rose by 3.2% year-on-year in October from 3.7% in September, against expectations of a 3.3% print.
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 are propped up by expectations that the Fed’s tightening cycle is ending, signaling the start of a Fed pivot. At the latest Fed meeting, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. Market odds of another rate hike in December have dropped to zero, while markets are pricing in rate cuts as early as March. Expectations that the Fed may start cutting interest rates from the first quarter of 2024 are propping up gold prices.
Oil prices seesawed last week, with WTI price rising to $79.6 per barrel mid-week, then plummeting to the $74.2 per barrel level. If WTI price declines, it may encounter support near $72.4 per barrel, while resistance may be found near $79.6 per barrel.
Oil prices plummeted on Thursday even as OPEC announced fresh production cuts in an attempt to maintain oil prices above the $80 a barrel mark. At the opening of the OPEC+ meeting on Thursday, it was announced that Brazil would be joining the organization.
OPEC+ producers agreed to over 2 million barrels per day of voluntary cuts, extending already existing output cuts into the first quarter of 2024 and adding even more. As output cuts will be voluntary, however, it was left to each country individually to announce its production cuts. There are clear signs of dissent between OPEC+ members. Oil prices plunged after the meeting as markets were unconvinced that the organization would maintain the output cuts.
Global economic concerns are dampening the oil demand outlook, putting pressure on oil prices. Oil prices are also kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. FOMC members have voted to keep interest rates unchanged at a target range of 5.25% to 5.50%.
The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months. Even if the Fed has reached its interest rate ceiling though, rates are likely to stay high for longer, driving oil demand outlook and oil prices down.
Crypto markets surged during the weekend in anticipation of the approval of crypto spot exchange-traded funds (ETF). Approval expectations of spot ETFs by the Securities and Exchange Commission (SEC) are boosting crypto markets. BlackRock and other institutions have applied for a Bitcoin ETF, which would bring more institutional and retail money into crypto markets. The SEC has been hesitant regarding the future of Bitcoin ETFs, delaying the decision. BlackRock has also filed an ETH spot ETF for approval, causing Ethereum prices to surge.
The recent settlement of the judicial case against Binance has benefitted crypto markets. The drawn-out case against Binance has been a major stumbling block in crypto spot ETF approvals and the removal of this obstacle renewed expectations of spot ETF approvals shortly.
On Saturday, Bitcoin shot up to its highest level in over a year and a half. Reports that a date has been set for Bitcoin spot ETF approval between January 5 to January 10 drove Bitcoin price up. The hype created over the news boosted crypto markets and most major cryptocurrencies gained strength over the weekend.
Bitcoin price surged over the weekend, shooting above the $38,000 level resistance, and touching $39,700. Bitcoin price raced to the $40K mark for the first time since May 2022. If the BTC price declines, support can be found near $36,700, while further resistance may be encountered near $40,000.
Ethereum price also surged on Saturday, climbing above the $2,130 resistance. If Ethereum's price declines, it may encounter support near $1,980, while if it increases, resistance may be encountered near $2,200.
Increases in central banks’ interest rates are putting pressure on risk assets. Most major central banks, however, are hitting pause on rate hikes, propping up crypto markets. FOMC members have voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. The Fed’s decision to pause rate hikes has increased risk appetite, boosting cryptocurrencies, especially since markets anticipate that the Fed has reached its rate ceiling.
On Friday, Fed Chair Jerome Powell delivered a speech that was more dovish than anticipated, hinting that the Fed has completed its tightening cycle. Markets pondered Powell’s speech over the weekend and renewed risk sentiment propped up cryptocurrencies.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
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