Week Ahead in FX (Dec. 12 – 16): FOUR Central Bank Decisions In Focus

Home » Week Ahead in FX (Dec. 12 – 16): FOUR Central Bank Decisions In Focus

It’s a busy week for market players everywhere as we price in FOUR central bank decisions and a few key inflation and labor market reports.

Think you’re ready to trade this week’s catalysts?

Before all that, ICYMI, I’ve written a quick recap of the market themes that pushed currency pairs around last week. Check it!

And now for the closely-watched potential market movers this week:

Major Economic Events:

UK’s labor market data (Dec 13, 7:00 am GMT) – The U.K. will kick off the top-tier data parade with a possible cooldown in the labor market in November as employers start to anticipate slower demand in 2023.

The unemployment rate is expected to tick higher from 3.6% to 3.7% while unemployment claimants increase from 3.3K to 3.5K. Average wages are seen speeding up from 6.0% to 6.1% though.

Lower-than-expected employment figures would support “peak inflation” speculations amidst labor shortages that are propping up wages.

US CPI reports (Dec 13, 1:30 pm GMT) – Recall that a (slightly) softer-than-expected core CPI reading sparked big rallies in stocks and bonds last month.

Analysts see further slowdown in consumer price growth, with the annualized CPI likely printing at 7.3% (from 7.7%) while the monthly rate clocks in at 0.3% (from 0.4%) in November. Meanwhile, core CPI is expected to dip from 6.3% to 6.1% and mark its lowest reading in four months.

Even slower CPI growth figures might not affect expectations of a 50bps rate hike this month, but it could influence expectations for next year’s rate hike (and cut?) schedule.

UK’s inflation (Dec 14, 7:00 am GMT) – Consumer prices jumped from 10.1% to 11.1% in October, the highest rate since 1981. Word around is that it would’ve reached 13.8% had the government not limited the price of household energy bills. Yipes!

Investors expect a slight slowdown in November with a 10.9% headline CPI reading while core inflation steadies at 6.5%.

Softer-than-expected inflation figures would give BOE more confidence to slow down its rate hikes from 75bps to 50bps this month.

FOMC statement (Dec 14, 7:00 pm GMT) – Everyone and their momma are expecting Fed Chairman Powell and his team to slow down their rate hike to 50 bps after FOUR consecutive 75bps rate hikes.

All eyes will turn to the Fed’s tightening pace next year. Word around is that the Fed’s revised projections will reflect higher inflation and GDP expectations in the near-term, which would justify a terminal rate that would rise above 5%.

The FOMC gang will also battle to contain “Fed pivot” expectations. Investors will look to see how willing Fed members are to cut their interest rates as early as the second half of 2023.

If markets choose to price in rate cuts in the foreseeable future, then we could see risk appetite soar and safe havens like the dollar dip across the board.

SNB’s policy decision (Dec 15, 8:30 am GMT) – After a 50bps rate hike in June and a 75bps increase in September, investors see SNB raising its rates by 50bps to 1.00% this month.

And why not? Switzerland’s inflation has gone down from its 3.5% highs to hit 3.0% in November. While that’s still above SNB’s 0.0% – 2.0% target, it’s also not as bad as what its neighbors are seeing.

SNB will likely signal one or two more rate hikes next year but also caution against uncertainty and upside inflation risks expected in the year ahead.

BOE’s policy statement (Dec 15, 12:00 pm GMT) – BOE members upped their tightening game last month with a 75bps increase – the biggest rate hike in 33 years – after a series of 25 and 50bps rate hikes earlier this year.

Traders see BOE taking a chill pill this week with “only” a 50bps rate hike to 3.50% amidst expectations that inflation has slowed in November and the government’s goals lining up with BOE’s anti-inflation objectives.

ECB’s policy decision (Dec 15, 1:15 pm GMT) – The ECB will close the rate hike show this week, likely with a 50bps interest rate increase to 2.50%. Some analysts haven’t ruled out a 75bps rate hike though.

ECB members have remarked on the upside inflation risks of the region’s fiscal stimulus programs and the room for slowing down rate hikes being “limited.” It also doesn’t help that macro data from the Eurozone have painted a picture of cooling activity in the last few months.

A 75bps rate hike could cause even more volatility among EUR pairs. It could even speed up/reverse intraweek trends so make sure to watch the newswires for market-moving surprises!

Forex Setup of the Week: US Dollar Index (DXY)

US Dollar Index (DXY) Daily Forex Chart

US Dollar Index (DXY) Daily Forex Chart

The Fed’s decision will be the name of the game this week so I’m expecting USD traders to be all over the place before and after the FOMC event.

The U.S. Dollar Index (DXY) is trading below the 200 SMA after breaking its 2022 uptrend.

Will this week’s FOMC decision set the stage for a longer-term downtrend for the dollar?

I’ll be on the lookout for a bounce from the 104.00 major area of interest.

If the dollar fails to find support from the inflection point, then it could turn lower and head for the 102.00 or 100.00 support zones.

But if this week’s headlines turn out to be dollar positive, then DXY could trade back above its 200 SMA and retest previous areas of interest like 107.00 or 108.50.

Don’t miss the FOMC decision as well as the catalysts listed above in case we see sentiment-changing headlines!

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