UPCOMING EVENTS:
Tuesday: US CPI.
Wednesday: FOMC Policy Decision.
Thursday: SNB, BoE and ECB Policy Decisions.
Friday: S&P Global US PMIs.
This week is really packed with events, and it will be probably the last one having high volumes and liquidity as we head into Christmas holidays. The major events are of course the US CPI and the FOMC Policy Decision. We saw a huge risk rally in the markets in November as weak economic data, the Fed’s peak hawkishness and a surprising miss in the US CPI unleashed a FOMO type price action.
That held true until recently as we got the ISM Services PMI, NFP and PPI all surprising to the upside. These reports made the current narrative murkier and as a result we saw some risk off sentiment.
Risks of a higher-than-expected CPI print and possible hawkish surprise from the Fed increased and the market went into defensive mode. This week we will probably get the answer to the question: is this the bottom of the US Dollar correction?
1-hour chart on tradingview.com showing rangebound price action in the US Dollar after recent data.
Tuesday: The headline reading for the US CPI is expected to show a 0.3% decrease for the M/M figure compared to 0.4% previously and a decrease to 7.3% for the Y/Y figure compared to 7.7% previously. The Core readings are expected to show a 0.4% increase for the M/M figure compared to 0.3% previously and a decrease to 6.1% for the Y/Y figure compared to 6.3% previously.
While a beat or a miss in the CPI report shouldn’t change the Fed’s intention of a 50 bps hike, it can change market expectations of the terminal rate, which as of now is around the 5% level reaching in March 2023 and cuts coming after November 2023.
Of course, the Fed can switch again to more aggressive hikes later if inflation reaccelerates but that’s for another day. Given the recent beats in other tier one economic data, a beat in the CPI report would be positive for the US Dollar and negative in case of a miss. Also, beware of “leaks” through WSJ in case of a surprising beat.
Wednesday: The Fed is expected to hike by 50 bps bringing the Fed Funds rate target to 4.25-4.50%. This move is expected and already priced in. The market will focus on the Dot Plot as Powell has communicated that the terminal rate has moved up compared to the last projections in September which indicated a 4.6% top.
The market already expects the terminal rate to be in the 5% area, so unless the Dot Plot diverges notably from the market expectations, it shouldn’t cause too much reaction. Macroeconomic projections are likely to show a lower revision to growth and inflation and higher revision for unemployment.
Hawkish surprises should be positive for the US Dollar and dovish or as expected outcomes could prove negative. The market is at a point though where economic data may be more important than what the Fed projects.
Thursday: The SNB is expected to hike by 50 bps bringing the rate to 1.00%. The slower pace of hikes is justified by the inflation report coming in lower than expected. The SNB is still hawkish, as depicted by recent comments from the SNB Chairman Jordan, and focused on bringing inflation back to target even via intervention in the FX market buying the CHF.
The BoE is expected to hike by 50 bps even if inflation advanced to 11% Y/Y. The MPC remains split with dovish and hawkish members. Some even voted for just a 25 bps hike at the last meeting (no comment). The BoE keeps leaning to the dovish side compared to the market pricing.
The ECB is expected to hike by 50 bps as recent comments from ECB members point to such move. The ECB may also announce an earlier than expected QT as a compromise with the more hawkish ECB members that want more aggressive hikes.
The reaction in the market will be more in relation to what happens with US CPI and FOMC than the outcomes of these central bank meetings. If things turn for the worse in US with CPI beating and more hawkish FOMC, then the US Dollar should be supported even if the SNB, BoE and ECB surprise on the hawkish side. If they go for the dovish surprises the USD would gain even more. On the other hand, if US CPI misses expectations and everything from the FOMC comes out as expected, we should see the US Dollar struggling more.
Friday: The S&P Global will release the latest US PMIs. The PMIs from the ISM showed more strength compared to the S&P Global ones and the market regards the ISM as a better and more reliable gauge. Nonetheless, significant surprises both on the weaker or stronger side should negatively or positively affect the US Dollar respectively.
This article was written by Giuseppe Dellamotta.
