Plenty to Play For in the Week Ahead

Plenty to Play For in the Week Ahead
A holiday-shortened week saw the dollar give up more ground as players continued to unwind their long dollar positions out of what had become one of the most crowded trades in recent memory. With the dollar index approaching a 38.2% retracement of the whole rally from summer 2021, it should now start finding some strong support. The FOMC minutes helped spark the sell-off in the greenback after they were interpreted as showing less than wholehearted internal support for Chairman Powell’s hawkish stance. Whether this reaction was justified is open to debate as it feels that the financial markets, particularly the equity markets, are desperate for a Santa rally and grasping at any reason to justify it.
Sterling was undoubtedly one of the primary beneficiaries of the softness in the dollar and rallied sharply. It was also helped higher by the treasury taking a hard line fiscally whilst the Bank of England is also talking a moderately hawkish stance; whether they walk the walk at the next meeting on December 15th is open to debate. The euro has also benefitted from the dollar’s downturn, with the market looking for at least a 50bp move at the ECB meeting also on December 15 th underpinning its advance. However, it was an extremely quiet week in terms of data, with a thin market exaggerating any moves. In truth, the market virtually came to a standstill as the US ingested and digested copious amounts of Turkey as it celebrated Thanksgiving Day.
At least in the week ahead, there are some important data releases for us and the market to get our teeth into. As is often the case, the US will lead the way with two, if not three sets, of crucial data, which could set the tone for the trading sessions leading up to the mid-December central bank meetings. First up, we have Core Personal Consumption Expenditure prices released on Wednesday before the Fed’s favoured measure of inflation, the Core Personal Consumer Expenditure deflator, is published on Thursday. The PCE deflator is expected to rise by .3% but after the recent lower-than-expected Consumer Price Index and figure greater than that could lead to a possibly sharp reversal in the current dollar sell-off. Also scheduled for Thursday is the Institute of Supply Management Manufacturing Data, which is expected to reflect the general softening trend in indicators just below the break-even of 50.
As usual in the first week of the month, the US Labor Department will publish Non-Farm Payroll data on Friday. The expectations are for about another 200,000 jobs to have been created despite the redundancies in the tech sector. The recent layoffs at Meta, Twitter etc., will probably not be fully reflected till January’s employment data. In other words, the final jobs data of the year may be the last firm number for some time despite there still being nearly two job vacancies for every person searching. The key event in the week will probably be Jerome Powell’s Wednesday speech. Chairman Powell’s address will be set against the recent softening of US bond yields, a falling dollar and rising stock markets. It’s not too much of a jump in imagination to expect him to come out with an all-guns-blazing hawkish speech as he continues to battle inflation, so be careful if you expect further falls in the dollar. Also scheduled for a busy Wednesday is the Q3 GDP for the US, which is forecast to be a robust 2.7%.
Closer to home, the eurozone also has some crucial data releases on this week’s docket, non more so than Wednesday’s Consumer Price Index. With the next rate-setting council meeting fast approaching, the strength or weakness of the number is bound to impact expectations of whether they will hike by 75bp or 50bp. With a relatively benign start to the winter weather-wise keeping energy prices under control, the market will be looking for a generally positive number of 10.5%. The big question is whether lower energy prices have fed through to the consumer as yet, which of course, would take the pressure off the ECB to be as aggressive as perhaps the market wishes it to be. However, we expect Isabel Schnabel will talk up her inflationary battling credentials tomorrow when she addresses a conference, as will Phillip Lane and Christine Lagarde when they speak. Europe also has sentiment indicators out tomorrow and, more pertinently, unemployment on Thursday.
Where does this all lead to sterling? Besides BoE Governor Andrew Bailey addressing the House of Lords tomorrow, it looks like one of the quieter weeks of the year. The only newsworthy data comes with the release by S&P of the Manufacturing Purchasing Managers Index on Thursday. More likely than not, this data will be overshadowed by the releases from the US on the same day leaving sterling to be buffeted in the crossfire. With sterling having gained nearly 8% in the last month, the odds are that we start to see it fall gently against the dollar; however, against the euro, it should hold quite well unless the Bank of England starts to backpedal on the likelihood of a 50bp rise at its next meeting.
With traders in the US back in the saddle this week and a data-rich agenda, we should be in for a fun week. There are, of course, events in China to keep an eye on as well as in crypto land, and of course, it is also month end, so we should have plenty of volatility as we approach the last week of what has been a momentous year.
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