London 14/12/2022

We’re in the middle of a very important week regarding the financial markets. Three major central banks (Fed, ECB, and the Bank of England) announce the inflation and the interest rate decision within the week. The first critical announcement took place yesterday: the inflation in the US  dropped further, from 7.7% in October to 7.1% in November. This fast de-escalation of the inflationary pressures endured amplified the perception that the Fed may slow down the aggressive interest rate hikes. The interest rates decision and the monetary policy statement of the Federal Open Market Committee (FOMC) are in a few hours and the most likely scenario is a 0.50% hike which is a major change compared to the 0.75% that the Fed announced several times this year.
As a result of the above, the equity markets rallied, commodities such as gold and oil performed important profits and the US dollar dropped against its main competitors. Even the bond yields fell with the US 10-year bond yield dropping to the zone of 3.50%.
There’s more to come this week, besides the FOMC today: interest rate decisions from the ECB and the Bank of England, the inflation in the Eurozone on Friday.
EURUSD (current price at 1.0646) is bullish this week, helped by the weakening of the dollar after the inflation announcement yesterday. It seems that inflation drops faster in the US rather than in the Eurozone and this makes sense in terms of the policies of the two central banks: Fed has increased the interest rates more aggressively than the ECB. Things could be better for the euro but the result of the Eurozone’s industrial production was disappointing:  -2% in October on a monthly basis. Tomorrow, the ECB announces the decision for the interest rates, and the markets estimate a 0.50% hike. The announcement is followed by the ECB press conference. Other factors that may affect the EURUSD are the US retail sales announcement tomorrow, the Eurozone inflation announcement on Friday, and on the same day, the PMIs for both economies.  The pair has managed to reach a 6-month high price and the next resistance exists at 1.0790.

GBPUSD (current price at 1.2365) is bullish this week mostly because of the weakening of the dollar. As the investing community awaits the interest rate decision by the Bank of England tomorrow, it tries to assess the result of the UK inflation that was announced earlier today. The UK inflation in November was announced at 10.7% which is lower than 11.1% in October but it is still at a rate that makes traders think that the Bank of England should raise the interest rates more. The decision for that is 0.50% and the expectation is for a 0.50% hike. Other UK economy announcements earlier this week had mixed results: GDP, industrial & manufacturing production, and trade balance were announced above market expectations. On the contrary, the jobs market declined and the unemployment rate rose marginally to 3.7% in October. If the dollar remains weak, the pair may climb to 1.25 or even higher. A possible surprise from the Bank of England tomorrow (0.75% instead of a 0.50% hike) may boost the pound even more. The same thing may happen for the dollar if the Fed raises the interest rates by 0.75% (scenario with low probability).

USDJPY (current price at 134.96) is bearish this week, having lost the milestone price of 135. After the inflation announcement in the US yesterday that caused the weakness of the dollar, the pair had strong downtrend pressures that strengthened even more with the drop in bond yields. The producer price index in Japan was announced in November to increase by 9.3% but according to the latest statements from officials, we should not expect any changes in the loose monetary policy from the Bank of Japan. The Tankan manufacturing index had a great result but since things don’t change in Japan, it’s all about the dollar. The same weakness of the dollar may cause more bears as the next support for the pair is at 133.60.

DISCLAIMER: The information produced by a-Quant is of a general nature only. It is not personal financial advice. It does not consider your objectives, financial situation, and personal needs.

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