Important calendar events
The dollar started to rally last week, and the dollar index climbed to the 104.0 level. Markets seem to have priced in interest future rate cuts, allowing the dollar to recover. US treasury yields slumped mid-week but gained strength towards the end of the week, with the US 10-year bond yielding approximately 4.23%.
The dollar is under pressure, as the Federal Reserve seems to have completed its hiking cycle. This coming week the spotlight is on the US Federal Reserve, as the Fed will announce its interest rate decision on the 13th.
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 Federal Reserve hit pause on rate hikes in November, leaving the door open, however, for another rate hike this year. In the past few weeks, however, it has become clear that the Fed has reached its rate ceiling. Not only that, but it is likely that the Fed is preparing to pivot to a less restrictive monetary policy, even though US policymakers insist that it is too early to talk about rate cuts. 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.
Fed chair Jerome Powell will deliver a press conference after Wednesday’s meeting, which is expected to attract traders’ attention looking for hints into the central bank’s future policy.
On the data front, last week’s US fundamentals were overall mixed. Average hourly earnings, which provide a first measure of consumer inflation, exceeded expectations rising by 0.4% in November versus 0.3% anticipated. The most important indicator released last week was Non-Farm Employment Change on Friday, which measures the number of jobs added to the US economy. Friday’s NFPs showed that the US added 199,000 jobs in November, beating estimates of 184,000 jobs and surpassing the 150,000 new jobs in October. In addition, the US unemployment rate dropped to 3.7% from October's near two-year high of 3.9%.
ADP Non-Farm Employment data on Wednesday, which show the change in the number of employed people excluding the farming industry, fell short of expectations. Wednesday’s data showed that 103K new jobs were created in November, compared to 106K in October, against expectations of 131K. US Unemployment claims on Thursday fell in line with expectations, with 220K individuals filing for unemployment last week.
Jolts job openings on Tuesday were also disappointing, putting pressure on the dollar. The number of job openings decreased to 8.73 million in October from 9.35M in September, falling short of expectations of a 9.31M print. US ISM services PMI data released on Tuesday were optimistic, boosting the dollar. ISM services PMI came in at 52.7 in November 2023 from 51.8 in October beating expectations of 52.2.
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. Core CPI, which excludes food and energy, also surprised on the downside.
Core PCE price index data 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.
US Preliminary GDP 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.
EUR/USD has been in a downtrend for the past couple of weeks, with the currency pair dropping below the 1.075 level on Friday. If the EUR/USD pair declines, it may find support at 1.070, while resistance may be encountered near 1.101.
The economic outlook of the Eurozone appears to be deteriorating, putting pressure on the Euro. Revised GDP 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. Year-on-year the EU economy registered stagnation with GDP flat at 0%. The Eurozone economy is struggling and cannot withstand much further tightening.
Services PMI data released on Tuesday for some of the Eurozone’s leading economies and for the EU as a whole were optimistic, providing support for the Euro. According to Tuesday’s data, the performance of the Services sector improved in October. The sector remains in contractionary territory, but the contraction rate has slowed.
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.
ECB’s Isabel Schnabel, who has been known for her hawkish stance, delivered a dovish speech on Tuesday, putting pressure on the Euro. Schnabel hinted that that interest rate hikes were off the table and that the central bank is on track to get inflation back to its 2% target.
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 next ECB policy meeting is scheduled for next week on the 14th, a day after the Fed policy meeting. The ECB is widely expected to end its tightening cycle and start cutting rates in March, as Euro area inflation is cooling.
GBP/USD edged lower last week, testing the 1.254 level support on Friday. If GBP/USD rate goes up, it may encounter resistance near 1.273, while further support may be found near 1.237.
UK Housing prices rose more than forecast in November, according to Halifax HPI data released on Thursday. Housing prices rose by 0.5% in November beating estimates of 0.3% growth and providing support for the Sterling.
The British Services sector is showing signs of improvement, boosting the Sterling. Final Services PMI data released on Tuesday revealed that the index rose to 50.9 in October from 50.5 in September, with a print above 50 denoting industry expansion.
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.
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.
The BOE Financial Stability Report was released on Wednesday but held few surprises as the central bank’s hawkish stance is well-known. Bailey held a press conference on the Financial Stability Report on Wednesday, reiterating that interest rates in Britain will need to stay at current levels for some time. Even though the current restrictive policy is hurting economic growth, the BOE has no choice but to continue its battle against inflation.
The next BOE interest rate decision is due next week on the 14th, a day after the Fed’s meeting. Market odds are in favor of a pause in rate hikes next week. The BOE’s rate decision is not so certain, however, as British policymakers were not unanimous in their latest voting, and inflationary pressures still run high in the UK.
Market expectations of the BOE’s future direction reflect the need to keep interest rates in restrictive territory for longer. The BOE policy is expected to begin to diverge from that of other major central banks. Both the FED and the ECB are widely expected to start cutting interest rates by March, while BOE rate cuts are not priced in before June.
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.
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 was volatile last week, with USD/JPY plummeting to the 141.6 level on Thursday before paring some losses and rising to 144.9 on Friday. If the USD/JPY pair declines, it may find support near 141.6. If the pair climbs, it may find resistance near 148.7.
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.
The next BOJ interest rate decision is due on December 19th. Market expectations that the BOJ may be finally ready to put its ultra-accommodating policy behind it are boosting the Yen. BOJ policymakers were more hawkish than expected last week, raising expectations of a shift in the central bank’s policy. BOJ deputy governor Ryozo Himino stated that ending the current ultra-loose monetary policy would not harm the economy. BOJ Governor Kazuo Ueda hinted on Thursday that the central bank might soon pivot to a less dovish direction. Ueda stated that the central bank can choose from a range of interest rates once it ends its negative interest rate policy.
Final GDP data for the third quarter of the year released last week were disappointing, putting pressure on the Yen. Japanese GDP for Q3 of 2023 was revised lower than initial estimates. Japan's economy contracted by 0.5% in the third quarter against earlier estimates of a 0.5% 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. Final GDP Price Index showed a 5.3% 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.
Tokyo Core CPI on Tuesday dropped to 2.3% year-on-year in November from a 2.7% print the month before. 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 exhibited high volatility last week as demand for safe-haven assets. Gold prices skyrocketed to an all-time high of $2,137 per ounce at Monday’s opening, but suffered a correction later in the day, plummeting to $2,025 per ounce. Gold prices remained steady until the end of the week but retreated on Friday, testing the $2,000 per ounce support. If gold prices increase, resistance may be encountered near $2,137 per ounce, while if gold prices decline, further support may be found near $1,987 per ounce.
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 started to rally last week, and the dollar index climbed to the 104.0 level. Markets seem to have priced in interest future rate cuts, allowing the dollar to recover. US treasury yields slumped mid-week but gained strength towards the end of the week, with the US 10-year bond yielding approximately 4.23%.
Gold prices surged in early trading on Monday as renewed hostilities between Israel and Hamas boosted the appeal of the safe-haven asset. A ceasefire last week had raised hopes that the fight may be over, but as the two sides resumed fighting over the weekend, gold prices were catapulted to a record high.
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 coming to an end, 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%.
This week markets will be focused on the Fed’s meeting on the 13th. 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.
Fed chair Jerome Powell will deliver a press conference after Wednesday’s meeting, which is expected to attract traders’ attention looking for hints into the central bank’s future policy. In addition, the BOE and the ECB will announce their interest rate decisions on the 14th, a day after the Fed.
Oil prices slumped last week, with WTI price retreating below the $69.0 per barrel level but recovering some of its losses on Friday and ending the week near $71.3 per barrel. If WTI price declines, it may encounter support near $66.7 per barrel, while resistance may be found near $79.6 per barrel.
Global economic concerns are dampening the oil demand outlook, putting pressure on oil prices. China’s oil demand outlook is decreasing, as the country’s economic growth is disappointing. Moody’s Rating Agency downgraded China’s outlook rating from stable to negative on Tuesday, citing increased economic risks and persistently lower economic growth. Chinese oil imports slowed down in November, putting pressure on oil prices. Oil imports in China fell by 9.2% year-on-year in November, reducing China’s oil demand outlook.
The US Energy Information Administration reported on Wednesday a crude oil inventory draw of 4.6 million barrels for the week ending December 1st, against an inventory build of 1.6 million barrels for the week before.
Oil prices have been retreating, even though OPEC+ recently announced fresh production cuts. 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. Markets were left unconvinced that the organization would maintain the output cuts and oil prices are declining.
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%.
This week markets will be focused on the Fed’s meeting on the 13th. Market odds of another rate hike in December have dropped to zero, while markets are pricing in rate cuts as early as March. 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.
Fed chair Jerome Powell will deliver a press conference after Wednesday’s meeting, which is expected to attract traders’ attention looking for hints into the central bank’s future policy. In addition, the BOE and the ECB will announce their interest rate decisions on the 14th, a day after the Fed.
Bitcoin price tested the key $44,000 level resistance last week but did not manage to overcome this barrier. If BTC price declines, support can be found near $37,500, while further resistance may be encountered near $45,000.
Ethereum price, on the other hand, broke through the key $2,300 level resistance last week, trading around $2,340 over the weekend. If Ethereum's price declines, it may encounter support near $1,980, while if it increases, resistance may be encountered near $2,300.
Bitcoin price skyrocketed last week to its highest level in over a year and a half. Bitcoin’s advance was transferred to other major cryptocurrencies as well. Since Wednesday, however, crypto markets struggled to maintain their bullish momentum as crypto bears fought to take back control.
Crypto markets have gained strength 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.
Reports that a date has been set for Bitcoin spot ETF approval between January 5 to January 10 drove Bitcoin price up. In addition, rumors that SEC representatives have met with BlackRock and Grayscale boosted the bullish market sentiment. The hype created over the news boosted crypto markets and most major cryptocurrencies gained strength over the weekend.
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%.
This week markets will be focused on the Fed’s meeting on the 13th. Market odds of another rate hike in December have dropped to zero, while markets are pricing in rate cuts as early as March. Market expectations that the Fed has reached its rate ceiling have increased risk appetite, boosting cryptocurrencies.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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