View from the Trading Desk:

After the Federal Reserve implemented its fourth consecutive 75 basis point rate hike, the headline Consumer Price Index in the US is finally showing signs of subsiding. Last week, the Bureau of Labor Statistics data revealed that the October CPI YoY figure was a cool 7.7%, coming in lower than the average economist estimates of 8%. In the space of a year, the US central bank has hiked the federal funds rate by 3.75% as it battles against decades-high inflation. Decelerating consumer prices may be the first piece of evidence we have seen that monetary tightening is having an effect. 

After Thursday's CPI print, the Dollar Index fell by over 4% before the weekend, causing investors to sell their Dollar positions based on the theory that the Fed will be forced to slow its pace of hikes. The door has now been opened to a 50 basis point hike in December, followed by smaller hikes thereafter, while the expected apex of interest rate remains unchanged at around 5%. The mood following the interest rate decision earlier this month was still hawkish despite the central bank interest rate reaching 4% for the first time in 15 years. Fed Chairman Jerome Powell signalled that the Federal Open Market Committee needed to remain aggressive against inflation but would take into account the lag with which monetary policy affects economic activity and consumer prices.  

Bottom line: It seems a fifth straight 75 basis point hike is unlikely at the Federal Reserve's next meeting following a somewhat dovish tilt at its November conference and softer consumer prices in October. In contrast, the Bank of England will likely continue with its aggressive policy tightening, which could lead to interest rates peaking in the UK sooner than in the US. The same could be said for the European Central Bank, which also opted for a 75 basis point interest rate increase at its last meeting and claims to be eyeing similar rate hikes in the future. The impacts on Asia-Pacific currencies can't go unnoticed either. With the rise of the Dollar, the Bank of Japan has previously had to intervene to support the Yen, so a softening of Fed monetary policy would likely strengthen the Japanese currency and relieve pressure on the BOJ.

The week ahead

GBP 

The Pound is 1% higher on a trade-weighted basis over the last week, hitting a two and half month high of $1.1872 against the US Dollar during the Asian session today. Fresh forecasts from Morgan Stanley released over the weekend suggest that interest rates in the UK could peak at 4.0% in March 2023, with rate cuts due to commence as soon as 2024. UK Chancellor Jeremy Hunt will publish the Autumn Statement this Thursday with tax increases and swathes of spending cuts due to be announced as Sunak’s new government seeks to bring stability to public finances and restore some credibility. 

• The Rightmove House Price Index contracted by 1.1% MoM in November versus a 0.9% gain in October as the housing market begins to slow.
• The number of people claiming unemployment benefits is expected to climb by 17.3K in the month of October, with more job market data due out on Tuesday morning. 
• UK CPI is forecast to clock in at 10.7% YoY in October compared with 10.1% in September as price pressures continue to pain Britons. 
• On Friday, UK Retail Sales are projected to expand by 0.5% MoM in October, while Monetary Policy Committee members Catherine Mann and Jonathan Haskel are also due to speak. 

EUR

The Euro has been another beneficiary of the recent US Dollar sell-off, trading back above parity, and has been trading just shy of the $1.03 handle. Hedge funds are gearing up for more upside in the common currency, with Euro calls at a 2:1 ratio to puts starting at a $1.05 strike with levels as high as $1.15 in demand. Ukraine forces managed to recapture the Russian-occupied city of Kherson over the weekend in a significant development in the nine-month conflict, with President Zelenskyy hailing the beginning of the end of the war. ECB Governing Council member Fabio Panetta, one of the more Dovish members at the bank, suggested that moves to rein in inflation should be cautious and all potentially adverse outcomes on the economy should be evaluated. 

• The German ZEW Economic Sentiment survey will be released on Tuesday; a -50.0 print is forecast for November.  
• G20 meetings are scheduled to take place over Tuesday and Wednesday while the European Central Bank is anticipated to release its latest Financial Stability Review. 
• European Central Bank President Christine Lagarde will speak on Wednesday and Friday this week. 
• German Bundesbank President Joachim Nagel is expected to speak at the European Banking Congress this Friday. 

USD

Dollar declines have been the theme the last week following a softer-than-expected CPI print on Thursday, which saw US headline inflation come in at 7.7% YoY for October. This prompted a sharp repricing of Federal Reserve interest rate expectations with a 50 basis-point rate hike at the December meeting now the baseline and subsequent smaller moves to follow. However, FOMC member Christopher Waller has given markets a reality check that rates will stay high for an extended period as the aim of quashing decade-high inflation remains a top priority. Elsewhere US President Joe Biden met with Xi Jinping, the President of China, for the first time since the start of the pandemic with the aim of reducing tensions between the world’s two largest economies. 

• The Empire State Manufacturing Index is forecast to print at -6.0 in November, versus -9.1 in October. 
• US PPI and Core PPI MoM for October will be released on Tuesday; analysts anticipate 0.4% and 0.3% readings, respectively. 
• On Wednesday, Retail and Core Retail Sales MoM for October are projected to read 1.0% and 0.5%.
• Federal Open Market Committee members Lael Brainard, Christopher Waller, James Bullard, and Loretta Mester are scheduled to speak throughout this week. 

 

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