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A turbulent year is fast drawing to a close and the most crucial week for central banks is upon us. The Federal Reserve will be headlining the last rate-setting decisions of 2022 that will also cover those of the European Central Bank, Bank of England and Swiss National Bank. But it’s not just central bank meetings cramming up the schedule. There will be a flurry of economic data too, led by the latest US CPI report and the flash PMI releases for December. As such, the US dollar, euro and pound will be fighting for the limelight.

The elusive wait for the Fed pivot

The Federal Open Market Committee (FOMC) will conclude its last meeting of the year on Wednesday and once again, markets seem to have fallen into the usual trap of expecting some kind of a dovish pivot in the run up to the event. To be fair, there is slightly more realism among equity traders this time round and it is FX and bond markets that appear at most odds with the Fed’s messaging.

If there was going to be a pivot, that happened on November 30 when Chair Powell gave his blessing to a slower pace of rate increases, flagging a 50-basis-point hike for December. For now, that’s as dovish as the Fed will get as both inflation and the labour market remain too hot for policymakers’ comfort. With many officials clearly signalling that the December dot plot will pencil in a terminal rate of at least 5%, investors are heading towards another reality check as futures markets see the Fed funds rate peaking just below that level.

While there is no denying that the US economy is edging closer and closer to a recession and there is more certainty that price pressures are subsiding, the job is far from done from a monetary policy viewpoint. Tuesday sees the release of the November CPI report, which is expected to reveal a slight moderation in the month-on-month rate.

Should Powell see the need to emphasise in his press briefing that restrictive policy is here to stay and suggests that rates may have to rise substantially above 5% to contain inflation, bond markets could be hit with the most volatility since the UK mini-budget crisis in September.

Long-dated Treasury yields have been sliding for the past month, which although this is a reflection that markets believe the Fed’s resolve to tame inflation, the Fed probably thinks this is a premature sense of confidence on the part of investors. Any attempt by Powell to ‘re-direct’ the markets could trigger a massive jump in Treasury yields, spurring the dollar higher.

However, not long after the Fed decision, markets will be put to the test again as November retail sales data are out on Thursday along with industrial production numbers, while S&P Global’s flash PMI readings will be watched on Friday for fresh clues about an impending recession.

ECB meeting: too early to slow down?

As the biggest risk from the Fed meeting is how out of lockstep markets have become, the main uncertainty about the ECB gathering is the incoherent communication, amid signs of a split among Governing Council members between those favouring a 75-bps hike on Thursday and those preferring 50 bps.

Investors have made up their minds, pricing in a 75% probability of a 50-bps increase. That leaves some scope for disappointment should the ECB not hike rates by 75 bps. There’s also a downside risk for the euro from the Bank’s latest macroeconomic projections should they point to a recession in 2023 or if President Christine Lagarde suggests an inflation peak is just around the corner.

However, markets may be underestimating the ECB’s determination to get a grip on inflation, particularly as the Bank’s own survey shows consumer inflation expectations creeping higher in the Eurozone.

Moreover, even if the ECB were to raise rates by only 50 bps or signal a slower pace at its next meeting, Lagarde could still surprise with a hawkish tone. That, combined with the Fed not sounding as hawkish, and the euro might just be able to stretch its recent gains and have a crack at the $1.06 level.

The final hurdle for the single currency next week will come on Friday when the flash PMIs for December are due. Analysts are forecasting no change in the manufacturing and services PMIs compared to November, with both readings expected to remain in contraction territory below 50.

SNB might make a leap down to 25bps

Another central bank that could ease its foot off the brakes is the Swiss National Bank. After a 75-bps increase at its last meeting in September when the SNB lifted its policy rate out of negative territory, it may be time to proceed more cautiously. After all, annual inflation in Switzerland has flatlined at 3% and the clouds over the global economy are darkening.

The question is, will the SNB make a drastic shift and raise rates by 25 bps, or will it opt not to stir things up and go with the market consensus of a 50-bps hike? The latter is more likely given that the SNB meets just four times a year and this could provide the Swiss franc with a bit of boost.

Having said that, even in the event of a bigger dovish tilt, the safe-haven franc would likely remain in demand over the coming year, especially versus the euro and pound, as recession risks mount for Europe and America.

Big week for sterling

The Bank of England is widely anticipated to raise rates for the ninth consecutive meeting on Thursday, with a 50-bps move being almost fully priced in. There are no new projections nor a press conference by Governor Bailey at the December meeting so any hints about the tightening path will come from the statement.

According to money markets, the Bank of England has the most hikes left to go in this tightening cycle among all the major central banks, and thus, there is less speculation about an imminent policy pivot. However, Britain also happens to be at highest risk of a recession and so next week’s barrage of UK indicators might steal the spotlight away from the BoE.

Monthly GDP figures will kick off the busy week on Monday and on Tuesday, the latest labour market report will be monitored for any signs of further job losses in October as well as an acceleration in wage growth. All eyes on Wednesday will be on the November inflation stats.

The consumer price index jumped to a fresh four-decade high of 11.1% in October. Any surprises in November could shape expectations ahead of the BoE’s decision the day after. Finally, retail sales numbers and the flash PMIs will wrap things up on Friday.

With the pound having established a floor at the $1.21 mark over the past week, that support may come under attack if the incoming data underscore the pessimism surrounding the UK outlook. However, as long as the dollar stays on the backfoot, the pound might still be able to maintain its uptrend. This would even more so be the case if next week’s policy announcements put the Fed and BoE on diverging paths.

An overload of major data

Elsewhere, Australian employment figures will be important for the aussie on Thursday, while the kiwi will be hoping for some direction from New Zealand’s third quarter GDP print the same day.

In Japan, it’s a packed week of economic releases, with the Bank of Japan’s quarterly Tankan business survey likely attracting the most attention on Wednesday, although the flash PMIs on Friday will be vital too. Whilst none of the data may be very market moving, they will help form an overall picture of the Japanese economy as the BoJ considers whether to start preparations for an eventual exit out of ultra-accommodative policy.

But in the meantime, the yen will be taking its cues from Fed policy as well as broader risk sentiment, which Chinese monthly indicators due Thursday will be contributing to.

Easing pandemic curbs and global recession fears continued to drive markets. Despite rising cases, China stepped up its easing of Covid-19 restrictions on a nationwide basis. Health authorities allowed the use of home quarantine for some Covid patients and test requirements will be scrapped for most public venues. A clear shift is taking place in official communication, with emphasis on economic recovery and the decreased severity of the Omicron variant. Chinese equities cheered on the news, however, sour risk sentiment and 'rate fears' weighed on US stocks. US yield curves inverted further and the 2s10s curve inversion is now at 84bp, a level only exceeded in 1978 and 1982, when Fed Chairman Volcker hiked policy rates aggressively to counter double-digit inflation, but also triggered two deep and long-lasting recessions. Despite the G7 Russian oil price cap and EU Russian oil ban coming into effect, oil prices continued to decline, reaching USD/bbl 77, the lowest level since December 2021. Bank of Canada hiked policy rates by 50bp, but signalled that this may have been the final rate hike for now. Canada is an interesting case, as it has been one of the frontrunners of the global rate hiking cycle in 2022, and we see a similar case for Norges Bank delivering its last 25bp hike at the meeting next Thursday.

Russian President Putin warned that his war is likely to become a long one. In a televised address, he said his invasion has already yielded 'significant' results and that he would not mobilise more troops. He also acknowledged that the risk of a nuclear war was growing, but insisted that Russia would only ever use nuclear weapons in response to an attack. Russia continued its attacks on Ukrainian critical infrastructure this week and European gas prices rose further, with the market not expecting any meaningful price drops in 2023, even outside heating periods, see twitter. A worrisome development for Europe's industry, as cracks in economic resilience have already started to appear in Q4 (see also Euro Area Macro Monitor - Chilling prospects, 6 December).

A busy week awaits, with central bank meetings in focus. The stabilization in euro area core inflation in November, paired with the weakening growth outlook and stable inflation expectations probably gives ECB enough arguments to slow the hiking pace to 50bp at the meeting on Thursday. However, we expect it to continue guiding for further rate hikes ahead, paired with a reduction of the balance sheet (QT), as 'stickily' high core inflation could remain a concern for ECB for some time yet (see ECB Preview - A hawkish 50bp, 8 December). US CPI figures will set the tone for the Fed meeting on Wednesday. Despite signs of peak inflation, economic data continues to paint a strong picture of services activity and the US labour market, with high wage inflation. From the guidance of Fed officials, a 50bp hike seems a done deal, but with the recent easing of financial conditions, further rate hikes might be needed in 2023 (see Fed Preview - Tightening pressure persists into 2023, 8 December). We also expect Bank of England to revert to a more dovish stance and join the club of 50bp hikes. December flash PMI figures are also on the agenda for the euro area, UK and US on Friday and we expect them to bring further evidence of the rising recession risks ahead, while focus will also be on the strength of the labour market and further signs of easing input cost pressures. EU leaders will gather on Thursday to discuss a ninth Russian sanction package, funding for Ukraine and the contentious gas price cap.

Full report in PDF.

BTCUSD (Bitcoin) pierced through its simple moving averages (SMAs) for the first time since the start of November to crawl back above the 17,000 round level.

While the weekly resistance of 17,380 seems to be a hurdle at the moment, and some weakness is evident in the RSI and the MACD, the indicators keep hanging within the bullish area, promoting a continuation higher. If that proves to be the case, the spotlight will shift towards the 38.2% Fibonacci retracement of November’s fall, seen at 17,842. Additional gains may flirt with the 50% and 61.8% Fibonacci levels at 18,540 and 19,240 respectively. Yet, whether the bulls have enough fuel to trim the collapse from 21,470 remains to be seen.

Should the bears retake control, squeezing the price beneath the 17,000–16,780 support region, some congestion could initially develop somewhere between 16,330 and 16,000 before the door opens again for the 15,749 low.

In short, BTCUSD is facing renewed downside pressures around 17,380. A successful close higher would strengthen the bull case.

A comparative examination of the strength of the US-Dollar often gives tangible insight into the direction of Gold (XAUUSD). The chart above indicates the expectation of a bullish price reaction from the demand zone. Increased strength for the Dollar simply implies possible bearish reactions for Gold. With this in mind, let's take a look at the Gold (XauUsd) chart.

XAUUSD - DAILY

The daily timeframe presents an interesting scenario with the joint confluence of the Pivot zone and the drop-base-drop supply zone - not to forget the 200-Day Moving Average too. These factors line up perfectly in favour of a bearish reversal from the marked zone. Let's take a deeper dive into the lower timeframe price action though.

H4 TIMEFRAME

The 4-Hour timeframe shows price wedged between two trendlines but a lower timeframe view makes an even clearer impression.

H1 TIMEFRAME

Here on the H1, price seems to be creating an AMD (Accumulation-Manipulation-Distribution) pattern over here which also serves as a bearish confirmation. Profit targets are; 1785, 1765, and 1755.

CONCLUSION

It is important to understand that the trading of CFDs comes at risk; if not properly managed, you may lose all of your trading capital. To avoid costly mistakes while you look to trade these opportunities, be sure to do your own due diligence and manage your risk appropriately.

Markets

With no eco data with market moving potential scheduled for release in the EMU, European fixed income traders kept a close eye on how much TLTRO funding banks had returned at the second early repayment window since the ECB changed conditions on the loans at the October meeting. After repaying a rather modest €296 bln in November banks this week returned € 447.5 bln of loans out of an outstanding amount surpassing €1.8 tn. Together with a smaller tranche maturing this month, the outstanding amount of TLTRO’s will decline to €1.32 tn. A reduction in excess liquidity and the repayment freeing collateral in theory should reduce demand for high-grade collateral. German Bonds today indeed underperformed both US Treasuries and EMU swaps. German yields traded 5/6 bps higher across the curve at the start of the US trading session. EMU swap yields at that time gained about 2/2.5 bps across the curve. Aside from this (admittedly important) technical ‘intermezzo’, one could expect US PPI data to be more important for the directional trend on global bond markets. US traders apparently anticipated a soft figure with yields easing a few bps in the run-up to the release. However, the soft bias this time didn’t pay off. US producer prices slowed less than expected with final demand PPI rising 0.3% M/M and 7.4% Y/Y (from 8.1% but 7.2% expected). The reaction was far from impressive, but the report at least prevented a further rally in US Treasuries. US yields currently vary between +1.5 bp (2-y) and + 7 bps (30-y). The US 10-y (3.52%) moves a bit further away from the 3.42% key support. German yields are gaining between 8/9 bps across the curve. The German 10-y yield (1.90%) will avoid a weekly close below the 1.77% neckline. Equities/US futures had to return earlier gains post-PPI. The EuroStoxx50 returned gains of 0.5% to currently trade little changed. US indices opened up to 0.75% lower (Nasdaq). Oil (Brent $76.6 p/b) continues to fight an uphill battle, losing more than 10% compared to last week’s close. After finishing this report the U. of Michigan consumer confidence (including measures in inflation expectations) still might change the course of events.

On FX markets, post-PPI USD gains, if any, remain modest. USD/JPY, despite a brief uptick even declines in a daily perspective (136.20 vs open at 136.67). EUR/USD is ceding a few ticks (1.0540 vs 1.0556 open). Surprisingly, sterling outperforms, both  against the dollar (cable 1.2275) and the euro, with EUR/GBP revisiting the 0.86 big figure. The 0.8647/60 support area isn’t out of reach yet.

News Headlines

Norwegian headline inflation eased more than expected in November. The multi-decade high of 7.5% Y/Y eased to 6.5% on the back of a monthly price drop of 0.3% (+0.3% expected). Core inflation, critical for the Norges Bank in setting monetary policy, unexpectedly fell too, from 5.9% to 5.7%. While both measures missed estimates, they remain well below the Norges Bank’s own 5.4% and 5% forecasts respectively due to a series of earlier upside surprises. The central bank remains on track for a 25 bps rate hike at the policy meeting next week. It will also publishes new forecasts at that December meeting. Back in September, Oslo penciled in a 3% terminal rate to be reached in the winter. After a string of topside inflation surprises, markets raised their own expectations to 3.50% only to pare them back recently to 3.25%. The fall-out on the Norwegian krone is limited with EUR/NOK hovering around 10.54. Still, the krone already lost quite some ground over the past few days, in lockstep with oil prices.

China held its annual “1+6” dialogue, involving talks with heads of the IMF, World Bank, OECD, WTO and others. Speaking after the meeting, IMF’s Georgieva said economic indicators suggest further downgrades to global growth are likely. She added that China’s recalibration of its Covid policies would help growth both domestically and elsewhere, echoing comments made by OECD’s Cormann. Malpass from the World Bank expressed concerns of a world at risk of a global recession, with a long-term crisis looming especially in developing countries. He said more needs to be done to lift the world out of stagflation and that China will have to reduce its excess stocks of food and fertilizer to alleviate shortages elsewhere. Okonjo-Iweala (World Trade Organisation) said global trade was losing momentum, expecting it to only grow 1% next year from 3.5% this year.

The US Dollar has been remarkably sluggish for the past few weeks despite being within a distinct Demand zone. My expectation of a springing rebound off the demand zone has not exactly played out yet, however, the zone remains unbroken. This means I can still uphold my bias for as long as the demand zone remains intact.

GBPUSD

GBPUSD is still cycling around the rally-base-drop supply zone. My expectation is that price pushes down at least to the 1.20200 area - the final target being the marked line at 1.17458. It is also crucial to note that the marked supply zone doubles also as a PIVOT zone (or flip zone).

EURUSD

The marked zone between 1.06378 and 1.05732 constitutes the preferred point of entry. There is a visible PIVOT zone that also overlaps with the rally-base-drop supply zone from the first BoS (Break of Structure). As a result, we can expect price to drop from the area of entry with profit targets at; 1.04055, 1.03250, and finally 1.00835.

USDCAD

USDCAD is trading inside a descending channel on the Daily timeframe. The Fibonacci retracement level can also be seen aligning perfectly with the rally-base-drop supply zone which intersects with the trendline resistance of the descending channel. These confirmations indicate a high chance of a bearish rejection from the marked zone with targets at; 1.33650, 1.32500, and 1.30900

USDJPY

Personally, I expect to see USDJPY make a run for the highlighted zone around the 142 price area, however, the journey may not begin as plainly as it ought. Price could initially stagger back toward the demand zone before finally yielding the bull run.

USDCHF

The arrow indicates my bias and expectation based on the daily timeframe price reaction from the demand zone. The major target is 0.96460.

NZDUSD

NZDUSD has reached a flip zone and is expected to dip lower toward the 100-Day Moving Average. It should also be noted that the marked supply zone is right within the vicinity of the 200-Day Moving Average.

CONCLUSION

It is important to understand that the trading of CFDs comes at risk; if not properly managed, you may lose all of your trading capital. To avoid costly mistakes while you look to trade these opportunities, be sure to do your own due diligence and manage your risk appropriately.

Daily Pivots: (S1) 136.21; (P) 136.72; (R1) 137.20; More...

Intraday bias in USD/JPY remains mildly on the downside for retesting 133.61 low. Firm break there will resume the decline from 151.93. On the upside, above 137.84 resistance will revive the case of short term bottoming, and turn bias back to the upside for 55 day EMA (now at 141.02).

In the bigger picture, a medium term top should be formed at 151.93. Fall from there is correcting larger up trend from 102.58. It's too early to call for bearish trend reversal. But even as a corrective move, such decline should target 38.2% retracement of 102.58 to 151.93 at 133.07, or further to 55 week EMA (now at 131.33). Some support should be seen around this zone to bring rebound. However, sustained break of 55 week EMA will pave the way to 61.8% retracement at 121.43.

Daily Pivots: (S1) 0.9329; (P) 0.9378; (R1) 0.9412; More...

Outlook in USD/CHF is unchanged. Intraday bias stays neutral with focus on 0.9325 support. Firm break there will resume larger decline to 0.9287 fibonacci level. On the upside, however, break of 0.9454 resistance will now indicate short term bottoming. Intraday bias will be turned back to the upside for 0.9545 resistance and above.

In the bigger picture, rise from 0.8756 (2021 low) has completed at 1.0146, well ahead of 1.0342 long term resistance (2016 high). Based on current downside momentum, fall from 1.0146 might be a medium term down trend itself. Break of 61.8% retracement of 0.8756 to 1.0146 at 0.9287 will pave the way to 0.8756. In any case, risk will stay on the downside as long as 55 day EMA (now at 0.9630) holds.

Daily Pivots: (S1) 1.0508; (P) 1.0537; (R1) 1.0583; More...

Intraday bias in EUR/USD remains neutral and outlook is unchanged. Firm break of 1.0594/0609 resistance zone will carry larger bullish implication. Next near term target is 61.8% projection of 0.9729 to 1.0481 from 1.0222 at 1.0687, and then 100% projection at 1.0974. Nevertheless, on the downside, break of 1.0442 support should confirm short term topping and turn bias back to the downside for 1.0222 support.

In the bigger picture, a medium term bottom was in place at 0.9534, on bullish convergence condition in daily MACD. Even as a corrective rise, rally from 0.9534 should target 38.2% retracement of 1.2348 (2021 high) to 0.9534 at 1.0609. Sustained trading above 55 week EMA (now at 1.0557) will raise the chance of trend reversal and target 61.8% retracement at 1.1273. However, rejection by 1.0609 will retain medium term bearishness for down trend resumption at a later stage.

Daily Pivots: (S1) 1.2178; (P) 1.2213; (R1) 1.2271; More...

Intraday bias in GBP/USD remains neutral. Consolidation from 1.2343 could extend. But further rise remains mildly in favor as long as 1.1898 support holds. On the upside, break of 1.2343 will resume the rally from 1.0351 and target 1.2759 medium term fibonacci level next. However, firm break of 1.1898 support will confirm short term topping and turn bias back to the downside.

In the bigger picture, rise from 1.0351 medium term bottom is at least correcting whole down trend from 1.4248 (2021 high). Further rise is expected as long as 1.1644 resistance turned support holds. Next target is 61.8% retracement of 1.4248 to 1.0351 at 1.2759. Sustained break there will pave the way back to 1.4248.