Forex Major Currencies Outlook (Dec 12 – Dec 19)

USD

ISM services PMI for November printed 56.5 vs 53.3 as expected and up from 54.4 in October. Prices paid and supplier delivery components declined. New orders slipped slightly but remained at a very healthy level while new export orders plunged below 40 indicating that strong dollar adds pain to already weak foreign demand. Employment index returned into expansion territory with 51.5.

The yield on a 10y Treasury started the week at around 3.53%, rose during the week to 3.6%, then fell and finished the week at around 3.5%. The yield on 2y Treasury reached 4.33% during the week. Spread between 2y and 10y Treasuries started the week at -80bp and widened to -84bp. FedWatchTool sees the probability of a 50bp rate hike in December at 74.7% with a probability of a 75bp rate hike at 25.3%.

This week we will have inflation data and Fed meeting. Inflation is expected to continue ticking down while 50bp rate hike is being fully priced in by the markets. We will also get new economic projections and a new dot-plot.

Important news for USD:

Tuesday:

• CPI

Wednesday:

• Fed Interest Rate Decision

EUR

ECB member of the Governing Council Villeroy stated that he is in favour of a 50bp rate hike next week and added that rate hikes will continue in 2023. ECB policymaker Makhlouf stated that 50bp rate hike should be the minimum next week adding that it would be premature to talk about terminal rate. ECB's Herodotou announced more rate hikes coming and added that they are very near neutral rate. ECB Chief Economist Lane also expects more rate hikes and added that “a lot has been done already”.

This week we will have ECB meeting and preliminary December PMI data. A 50bp rate hike is what markets are expecting, with around 75% probability.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

Friday:

• CPI
• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

GBP

Pound had a quiet week, moving in range of almost 150 pips against the USD. First it reached the high on Monday, then the low on Wednesday and returned back to Monday’s high on Friday. The currency utilised CAD’s weakness and GBPCAD pair shoot over the 1.67 level,

This week we will have a plethora of data from the UK starting with GDP, then moving to employment, inflation, BOE meeting and finishing with preliminary PMI data for December. BOE is expected to raise interest rate by 50bp.

Important news for GBP:

Monday:

• GDP

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Thursday:

• BOE Interest Rate Decision

Friday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

RBA delivered a 25bp rate hike as expected bringing the cash rate to 3.1%. Further interest rates are expected over the coming period as inflation is too high and board remains determined to bring inflation back to their target of 2-3%. A further increase in inflation is expected with inflation peaking at 8% in Q4 of 2022. The bank sees inflation declining over the next couple of years and settling at little above 3% in 2024. The economy is growing solidly and projected growth is at around 1.5% for both 2023 and 2024. Household spending is expected to slow down over the coming months. Size and timing of future increases determined by data and outlook for inflation and labor market.

Q3 GDP printed an increase of 0.6% q/q vs 0.7% q/q as expected and down from 0.9% q/q in Q2. Terms of trade declined by 6.6% in Q3 while household saving ratio decreased to 6.9% from 8.3% as high inflation causes people to spend more and decreases their ability to save. Household spending rose 1.1% thanks to increased spending on hotels, cafes and restaurants as well as on transport services. Government spending rose 0.1% with private investment rising 0.8% and public investment falling 3.4%.

Caixin services PMI continued to plunge in November and printed 46.7 vs 48.4 in October. This has dragged the composite to 47 from 48.3 the previous month. Covid restrictions in China weighed heavily on business activity. Trade balance data showed more pain caused by covid restrictions. Surplus declined to $69.84bn from $85.15bn in October as exports plunged 8.7% while imports fell even more 10.6%. Chinese authorities announced that milder and asymptomatic cases will be able to quarantine at home and that it will accelerate vaccination of elderly. Negative covid test will no longer be required for domestic travel. These are big steps towards abandoning of zero-Covid policy. Inflation data for November saw CPI drop to 1.6% y/y from 2.1% y/y in October while PPI printed another drop of 1.3% y/y reading, just as previous month.

This week we will have employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Thursday:

• Employment Change
• Unemployment Rate
• Industrial Production (China)
• Retail Sales (China)

NZD

GDT index increased by 0.6% at the latest auction marking the second consecutive auction of rising dairy prices. Fonterra, a company that is responsible for around 30% of world’s dairy exports, lowered the year-end price for farmgate milk.

This week we will have a Q3 GDP reading.

Important news for NZD:

Wednesday:

• GDP

CAD

BOC delivered a 50bp rate hike bringing the interest rate to 4.25%, however the message was dovish. Although markets were expecting a 25bp rate hike and were positively surprised with a larger 50bp rate hike the accompanying statement was abound with hints that BOC will stop their pace of rate hikes in the near future. Sentences like "growing evidence that tighter monetary policy is restraining domestic demand" and "growth will essentially stall through the end of this year and the first half of next year" indicated that consumer spending and housing market are weakening leading to a weaker growth. Inflation is also expected to moderate as “price pressures may be losing momentum". The final paragraph showed that the bank is now considering whether further rate hikes will be necessary.

JPY

October wage data showed that real wages fell -2.6% y/y which is the highest drop since 2015. Nominal wages rose for the tenth consecutive month, came in at 1.8% y/y, but the increase was crushed by the higher inflation. Without wage growth inflation cannot be sustained at 2% as BOJ Governor Kuroda was quick to point out. Household spending increased for the fifth straight month and came in at 1.2% y/y. Final Q3 GDP saw small improvement with -0.2% q/q and -0.8% annualized vs -0.3% q/q and -1.2% annualized as preliminary reported.

CHF

SNB total sight deposits for the week ending December 2 came in at CHF549.8bn vs CHF555.4bn the previous week. Total sight deposits continue to decline but it seems that the pace is slowing down. Seasonally adjusted unemployment rate in November ticked down again to 2%. Tightness of the labour market is astonishing as the unemployment rate is lowest among developed economies.

This week we will have SNB meeting where another 50bp rate hike is expected.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}