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Lag effect

View from the Trading Desk:

US inflation has been rampant in recent years, forcing the Federal Reserve to take extreme measures by raising its main policy rate to 4% for the first time in almost 15 years, with further rate hikes already priced into markets. But those paying close attention will have noticed that the YoY US Consumer Price Index has been on the decline since July after hitting its peak at 9.1%, signalling that we could be in the process of seeing inflation on its way back to its longstanding 2% target. During his speech last Wednesday, Federal Reserve Chair Jerome Powell indicated that the central bank would start to slow its interest rate hikes this month, injecting some cautious optimism into global markets.

The previous four Fed policy rate decisions have each been a 75-basis point increase, so we might see the final meeting of 2022 result in a 50 or even 25-point hike. However, it might be premature to think that inflationary pressure may be somewhat easing off the US central bank. Looking at the month-on-month Consumer Price Index, we have seen a 0.4% increase for the previous two consecutive months. This suggests that the tightening of monetary policy is yet to have the desired effect against soaring inflation, namely, to reduce high consumer prices that are eating into the purchasing power of Americans, without sparking a recession.

The main driving factor for global inflation is wholesale energy prices which have skyrocketed since Russia invaded Ukraine at the beginning of the year. European gas futures are up 80% for the year to date, but have started to subside after hitting their peak in late August. However, it will be some time before CPI figures will show the effects of this, suggesting that inflation will remain elevated for longer and keep the pressure on the Fed to continue its run of interest rate hikes.

Bottom line: A strong-performing US labour market coupled with elevated energy prices continues to keep the pressure on the Federal Reserve to continue hiking its policy rates. However, with annual CPI data showing signs of regressing and natural gas futures tapering off from their summer peak, we could start seeing signs of this filtering their way into US consumer price figures, resulting in a less hawkish decision from the central bank next week.  

The week ahead


The Pound mainly traded flat over the course of last week on a trade-weighted basis and was the fourth best-performing currency in the G10 relative to the Dollar for total return. Dovish sentiment is beginning to build at the Bank of England, with many expecting the last 0.50% move during the current hiking cycle to come in December as inflation expectations show signs of peaking. Wage growth expectations at 5.8% are still well above the central bank’s target of 3%-3.5% as concerns that higher compensation will keep inflation elevated well into 2023. UK mortgage approvals have fallen 20% in the last two months as the housing market begins to show some significant signs of weakness. 

  • The UK Construction PMI will be released on Tuesday, and a 52.1 print is expected for the month of November. 
  • The Halifax House Price Index MoM for November is set to be published on Wednesday, with the index declining by 0.4% in October. 
  • Thursday will see further housing market data as the RICS House Price Balance is forecast to fall 10% in November. 
  • Consumer Inflation Expectations are due on Friday, which will provide an insight into how households across the country see prices changing in the coming year. 


The Euro is holding its ground against the Dollar, settling between the $1.04-$1.05 range at the end of last week as bearish sentiment on the common currency looks to be fading. Downside volatility has abated as traders unwind short bets, and demand for upside participation begins to rise. Calls on EUR/USD are facing modest demand as high as a $1.15 strike, with market pricing taking a firm view that further weakness is behind us. Yannis Stournaras, a Governing Council member at the European Central Bank, has voiced support for gradual interest rate rises following softer-than-expected Eurozone CPI, which rose an estimated 10.0% YoY in November. 

  • The Eurogroup meetings will take place today as Finance Ministers from Eurozone countries coordinate economic policy. 
  • German Factory Orders MoM for October are expected to come in flat at 0.0% after a 4.0% decline in September. 
  • On Wednesday, German Industrial Production is projected to read -0.6% MoM for October. 
  • European Central Bank President Christine Lagarde is due to speak at the European Systemic Risk Board conference this Thursday. 


Dollar declines continued last week as optimism continued to work its way through markets. The Bloomberg Dollar Index fell 90 basis points despite a short-lived rally on Friday. This followed better-than-expected Non-Farm Payrolls data, which clocked in at 263K, beating estimates of 200K. A strong labour market supports the Federal Reserve’s fight against inflation as signs that the economy is strong enough to weather higher interest rates continue to reveal themselves. United States President Joe Biden also expressed his willingness to speak alongside NATO with Russian leader Vladimir Putin if there was express intent to bring the conflict in Ukraine to an end. 

  • The ISM Services PMI is due to be released later today and is forecast to read 53.5 in November. 
  • Estimates for US Unemployment Claims week ending the 3rd of December indicate a 246K print versus 225K in the week prior. 
  • US PPI and Core PPI MoM are both estimated at 0.2% for November and will be released this Friday. 
  • Preliminary University of Michigan Consumer Sentiment is projected to come in at 56.9 in December, little changed from the November print of 56.8. 


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