·       The sterling started the day weaker against the greenback and continues to lose as UK Inflation data came in lower than expected. November Core CPI YoY and Headline CPI YoY rose 5.1% vs. est. 5.6%, and 3.9% vs. est. 4.3%, respectively.

·       Cable currently trades at 1.2677 and, FTSE and Gilt futures look set to a good start of day as this notable slowdown in inflation can increase rate cut speculation.

·       The euro tried to aim for 1.10 yesterday afternoon, but we got as far as 1.0987. Today we are lower, consolidating near 1.0950 ahead of today’s Germany PPI and consumer confidence.

·       The Yen trades at 143.50 against the US Dollar, consolidating below 144 as traders digest BOJ’s decision of no changes in their negative rate monetary policy.

·       Oil is little changed this morning after gaining for two consecutive days, as traders and shippers wait for any developments on the disruptions on the Red Sea as it can signal a potential escalation of the Israel-Hamas conflict.

This will be the last Market Watch update of 2023, and we would like to wish all our readers a Merry Christmas and a Happy New Year.

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           The Yen starts the day lower after the Bank of Japan left monetary policy unchanged, as widely estimated by economists. Forward guidance was not changed, with no mention of rate increases. The focus now shifts to BOJ’s Governor, Kazuo Ueda, press conference for any further clues regarding monetary policy.

·       USD/JPY advanced to trade mid 143-144, after touching 144 earlier in the session.

·       The euro continues to trade above 1.09 against the US Dollar as European investors wait for today’s final CPI for November. Headline and core gauges came in below estimates last month, and the same is expected for this final release, adding further evidence that price pressures are continuing to cool with CPI YoY ticking lower to the estimated 2.4%, vs. prior 2.9%.

·       The sterling continues to trade mid 1.26-1.27, at 1.2660 as focus changes to UK retail data, which can flag a risk of a recession again.

·       The euro hit a two-high against the sterling as traders surf ECB’s rate-cut pushback.

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Two Federal Reserve officials pushed back on market expectations of a Fed pivot towards monetary easing as soon as March next year. NY Fed President John Williams stated that it is too early to speak about cuts as they question if policy is sufficiently restrictive to bring inflation back to the Fed’s 2% goal. Raphael Bostic, Atlanta Fed President, also backed Williams words, stating it is “premature” to think about rate cuts before March, and that he only expects rate cuts but not until the third quarter.

The US dollar recovered on Friday, and it now starts the week lower against major peers ahead of this week’s data.  The Dollar Index is muted at 102.44.

Key data/events to watch this week in the US:  Housing starts (Tue.); Existing Home sales (Wed.); Initial Jobless claims (Thu.); 3Q GDP (Thu.); PCE and Core PCE Deflator (Fri.).

In the euro-area, the euro gains and consolidates above 1.09. ECB members has also stated it is too early to talk about rate cuts and that markets are rushing themselves with betting on policy easing for the first two quarters of next year.  ECB’s Christine Lagarde added that the central bank did not discuss lowering borrowing costs at last week’s meeting.

Key data/events to watch this week in the Euro-area:  Germany IFO Survey (Mon.); Euro-area final CPI (YoY).

In the UK, cable heads towards 1.27 as all attention shifts to UK inflation, where it is expected to have eased further in November.

Key data/events to watch this week in the UK:  UK CPI inflation YoY (Wed.); UK Retail sales MoM (Fri.).

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·         After another round of policy meetings yesterday, the Federal Reserve remains the most dovish central bank in the G10. The FOMC have been actively discussing rate cuts while others are hiking, or comfortably on hold or pushing back against early cuts. Markets were further spooked yesterday following the unexpectedly dovish policy meeting, when a strong retail sales report and lower jobless claims print pushed the greenback lower against its peers. The dollar index fell to its lowest level since August, pushing EURUSD briefly above 1.10 and GBPUSD to within a whisker of 1.28.

·         The Bank of England held interest rates unchanged yesterday, sticking with its recent message that borrowing costs will remain high for some time. Governor Andrew Bailey said that the central bank is taking a “more cautious” stance than markets, adding that “it’s really too early to start speculating about cutting interest rates.” In a further warning, he said, “I don’t think we can say definitively that interest rates have peaked. I hope we’re at the top of the cycle.” His comments, along with the dollar sell off kept cable supported, however the 1.2750 area remains key with a break to the downside giving bears a potential run at the 50-day MA.

·         The ECB also kept rates on hold yesterday, with President Christine Lagarde warning that policymakers must not get complacent following the recent slump in inflation in the euro area. In a further contrast to recent Fed speak, Lagarde confirmed, “We did not discuss rate cuts at all.”

·         Ahead this morning we look forward to the release of PMIs from the Eurozone and UK. These are followed by US PMIs this afternoon, along with Empire Manufacturing and Industrial Production data.  

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·         As expected, the Federal Reserve kept interest rates unchanged as officials concluded the final policy meeting of the year. Rate setters gave an early Christmas presents to markets in the form of a dovish outlook with a dot plot which showed 75 basis points of cuts in 2024 -a sharper pace of cuts than last indicated in September. The US dollar fell, and treasuries rallied pushing the 10-year yield below 4% for the first time since August, with futures markets now pricing in 140 basis points of easing in the next 12 months. Data released ahead of the Fed announcement showed slowing PPI gains as energy pricing falls, which followed CPI data which showed a decrease in the annual rate of inflation – further signs that prices are finally trending back towards the Fed’s target.

·         The Japanese yen was one of the biggest gainers against the under-pressure greenback yesterday with USDJPY falling just below 141 before consolidating. The dollar lost ground against most of its G10 peers, with EURUSD posting gains above 1.09 and cable back on a 1.26 handle.    

·         Both the ECB and BoE hold policy meetings today and both are expected to keep rates on hold. Following yesterday’s Fed pivot towards lower rates, markets have ramped up bets on additional cuts next year from the ECB and BoE. Markets now price in 157 basis points of ECB easing, suggesting at least six 0.25% cuts in 2024. For the UK, markets now have fully priced five cuts of the same magnitude – up from three a few weeks ago.

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·         The November US CPI report came out broadly inline with expectations at 0.3% m/m, initially dropping the US dollar, however the brief sell off was short lived as the greenback recovered. The year-on-year CPI print came in as forecast at 3.1%, however sticky core services remain a concern, with the data further suggesting the “higher for longer” outlook remains as markets temper expectations of aggressive cuts next year. The November PPI release is due this afternoon, with markets expecting a small decline in November due to a continued decline in energy prices.

·         The FOMC concludes its two-day policy meeting later this evening, with rate setters widely expected to hold rates steady for a third consecutive meeting. The committee releases an updated Summary of Economic Projections, which will likely show a downward revision to inflation and an upward revision to GDP growth. Markets will also pay close attention to Chairman Powell’s news conference where investors will be waiting to see if the committee discussed the conditions under which rate cuts would happen.

·         The pound dropped this morning after data released showed that the UK economy shrank more than expected in October as the BoE’s aggressive rate hikes continue to impact growth. GDP fell 0.3%, the first drop since July, following a gain of 0.2% in September, adding to fears that the UK is stuck in a cycle of stagnation. The data likely confirms a further hold at tomorrow’s MPC meeting with markets pricing in the first interest rate cut to come in the summer of next year. Cable dropped below initial support at 1.2530 after the release, opening up a potential attempt at the 1.2450 support area.

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·         It has been a subdued start to the week, with the Fed still in blackout ahead of their latest policy meeting and markets seemingly in December trading mode. However, things are likely to liven up in the coming days, as we await key data and central bank meetings. This afternoon’s US CPI print will be closely monitored as investors look for clues on the Fed’s policy into 2024. It is likely that headline CPI will be flat for a second consecutive month, possibly giving the central bank room to consider rate cuts as inflation risks become more balanced. Year on year headline CPI is expected to fall slightly to 3.1% from 3.2%, with falls aided by lower gasoline and used car prices. Today’s print is unlikely to influence this week’s policy decision from the FOMC but may impact the timing as to just when rate setters will be expected to start to cut interest rates in 2024.

·         Data released this morning showed that UK wage growth slowed in the three months through August, in a further sign that the labor market is cooling in response to a struggling economy. Average earnings excluding bonuses rose 7.3% from a year ago, down from an upwardly revised 7.8%. The print suggests that members of the MPC have done enough to rein in inflationary pressures coming from the labour market after the recent aggressive rate hiking cycle. Another hold from the BoE is on the cards this week, with markets continuing to expect the “higher for longer” rhetoric to remain. The pound dropped after the data release and remains below the psychological 1.26 area, supported at 1.2550.

·         The single currency remains steady against the greenback, with EURUSD hovering in the 1.07-1.08 range ahead of the German ZEW survey due to be released this morning. Markets will be looking to see if the German economy has passed its lowest point with tighter financial conditions continuing to drag on the euro areas largest economy.    

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·         The US dollar starts a busy week on solid ground after Friday’s above consensus non-farm Payroll release. The print showed upbeat job creation in November, with 199,000 roles created, above the expected 185k, prompting markets to pare back US rate cut expectations in the first quarter of 2024. The release serves as a timely reminder to markets that Fed cuts are not a certainty next year and come ahead of a busy week of data releases and market events in the coming days.

·         Both the ECB and the Bank of England hold their final policy meeting of 2023 this week, with both expected to keep interest rates unchanged. Both central banks are expected to signal that monetary policy once again will need to remain restrictive as they will likely push back on market expectations of early rate cuts in the first half of next year. Tuesday sees the release of UK jobs data for November, where markets will be looking for evidence that wage gains are softening. UK Monthly GDP is out on Wednesday when we look for clues to see if the UK slipped into a downturn in the final quarter of the year.

·         Thursday sees the BoE and ECB meeting and whilst little in the way of fireworks are expected, the ECB’s Governing Council will probably discuss a change of timing for winding down its Pandemic Emergency Purchase Program (PEPP).

·         Central bank policy meetings will likely grab the headlines this week, and the Fed also hold its final meeting on the year, with another unchanged announcement expected on Wednesday. Ahead of the policy meeting, Tuesday sees the release of the November CPI report, where the headline rate is expected to come in flat for a second straight month. PPI inflation is released on Wednesday, and Thursday sees the release of Retail Sales and jobless claims ahead Empire Manufacturing and Industrial Production on Friday.