Currency and Stock Markets. Daily Insights

[stoch]

Three key inflation factors in the US to watch for according to Goldman



The dollar came under pressure on Tuesday, as bond yields of longer maturity fell in the US and risk assets, in particular US stock indices, find little resistance near recently set new ATH. The SPX managed to closed above 4700 again on Monday while Nasdaq extended winning streak to 11th session (the longest streak since July 2009). SPX futures are slightly down today.

Treasuries rose yesterday on speculation that Powell's successor as head of the Central Bank could be another Fed official, Layle Brainard, a well-known advocate of low rates and soft monetary policy.

Speaking yesterday, Fed official Richard Clarida said the Fed expected supply shocks but their depth was unexpected. A statement of this kind can be regarded as an attempt to leave room for the Fed's hawkish maneuver if inflation turns out to be higher and more persistent than expected.

Meanwhile, Goldman has significantly revised inflation forecast for December 2021 for the sixth time in a row since April, which speaks of underestimation of inflation and supply-demand imbalances not only by the Fed, but also by market forecasters. According to the latest forecast, CPI will exceed 6% (headline inflation), and PCE - 5% in annual terms:

Back in April, the CPI forecast was 2.77%, PCE - 2.37%.

Inflation will remain high until relatively low inventory levels begin to recover and competition drives prices down. Indeed, new car inventories and retail stock-to-sales ratios are unusually low in the United States:

Apart from robust recovery of consumer demand, ubiquitous supply disruptions and rising input prices serve as additional headwind to replenishment of low inventories.

According to Goldman, two other key inflation factors that need to be monitored are wages and shelter rent. Employment costs remain in the rising path (QoQ), while shelter inflation after posting the highest growth rate in a decade in June 2021, somewhat subsided in the second half:

In the near term, the latest US PMI data for services and manufacturing indicated that inflation-propelling data persisted in October - entry prices rose and new orders increased from the previous month.


On Wednesday, the US inflation report for October is due to release and given preliminary data, a hawkish surprise looks likely (headline inflation 6% and above). Yesterday's comments from Fed officials, in particular Clarida and Evans, showed that some Fed officials allow for the possibility of a rate hike during QE tapering. Therefore, there is a clear bias in market rumors that the trajectory of tightening the Fed's policy may be revised upwards which undoubtedly lends heft to bullish dollar case in the medium-term.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

GBP, EUR may soon find support thanks to strong technical levels


Much of the fall in EURUSD this week was due to the widening of the rate differential between short-term EU and US bonds. Following the CPI release on Wednesday, the yield gap rose 4 bps. and then added another 6 bp over the next two days. reaching 1.267% (maximum since the beginning of the pandemic):

The potential for further decline in the pair next week remains due to the prospects of the Fed to announce more aggressive measures compared with the relatively dovish position of the ECB. The dollar index feels quite comfortable above 95 points and is holding close to the opening point on Friday. EURUSD could be pressed down to 1.14 - 1.138, from where a corrective wave of purchases is expected, which looks very attractive, given that a rebound will occur from the lower border of the medium-term descending channel:

It should also be remembered that price pressures haven’t likely topped out in the US yet, because the shopping season is ahead, which is a powerful seasonal driver of price increases. This year, the full-fledged season of Christmas discounts in the US will likely be missed, as we discussed earlier, inventories in the US (especially of durable goods like cars) are at a relatively low level and making discounts, knocking down inflation, is not a particularly attractive idea for retailers right now.

The British economy data on Thursday was disappointing. Manufacturing and industrial output growth missed estimates, with the impact of Brexit being felt, creating additional disruption to supply chains, in addition to the global trend. GDP in September grew less than forecast, so the recent unexpected twist at the meeting of the Bank of England, which was that the Central Bank refused to raise the rate, looks quite justified. The market may start to price in the outcome in which the Bank of England will disappoint in December as well, announcing that it extends the pause in tightening till the next meeting. In this situation, there is a risk of further expansion of the yield differential between UK and US assets and, accordingly, an increase in pressure on GPBUSD.

As in the case of EURUSD, a bearish channel can be seen in the technical picture of the pair, and GBPUSD is also apparently preparing to test its lower border. At the same time, given the presence of a clear steep downtrend line, a short-term rally to 1.3460 is possible and then a sharp movement down to the lower border of the channel (1.3270):

The focus today is a report from U. Michigan on consumer sentiment, as well as a speech by Fed rep Williams. A rebound in the consumer sentiment index, and in particular the expectations index, after several months of rather weak readings will reinforce the argument that the US Christmas season may further accelerate inflation, so a moderately positive dollar reaction to the strong data can be expected. In turn, Williams' comments will be examined for concerns about entrenched inflation and the Fed's potential reaction to it.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

The Dollar still has chances to rise this week


The week began with a broad greenback retreat, but with varying intensity, from weak to moderate. Industrial output and retail sales in China slowed less than expected, dampening risk aversion somewhat on fears of a slowdown in the Chinese economy.

Despite the weak dollar at the beginning of the week, there is potential for strengthening, especially in light of the Fed's as yet unclear reaction to the strong positive inflation shock in October. There is a risk that the Fed may respond by accelerating the pace of the QE rollback or bringing the rate hike closer. Among the reports for the United States, it is worth paying attention to October retail sales and industrial output.

The Fed's speech calendar this week includes Williams, Evans, Bostic and Clarida. Investors are waiting for their reaction to the controversial inflation report, which may well lead to a rise in the US currency, as inflation becomes more difficult to deny.

The cost of living in the United States is growing rapidly, so consumer confidence is showing an increasingly depressing trend. The consumer confidence index from W. Michigan fell to 66.8 points, data showed on Friday. This is the minimum since 2011:

However, the relationship between consumer sentiment and spending has been weak over the past few years, and the fall in the index primarily reflects concerns about inflation.
The details of the report showed that only 36% of the surveyed households believe that income will grow faster than inflation over the next 5 years. This share has been steadily declining over the past few months. Most of them felt that now was not the time for high-value purchases such as a home, car, and real estate.

With regard to the JOLTS report on the US labor market, it showed that the share of layoffs rose to 3.4% of the workforce in the private sector, while in the hospitality and entertainment sector it was 6.4%, 4.4% in retail and 3.6% in trade and the sector of passenger transportation. In fact, this is further evidence that companies have to fight for workers by raising wages. This trend is reflected in the Labor Cost Index - which rose to a multi-year high in the third quarter:

At the same time, the NFIB in its latest report pointed to a record number of companies that are going to raise salaries in the coming months.

The number of job openings remains very high at 10.4 million and based on the job growth we saw in October, it will take 20 months to fill these vacancies. Particular attention should be paid to labor “reserves” - if the level of labor force participation continues to recover as slowly as now, the pressure on wages will persist, and therefore the risks of inflation will also remain high.

The third quarter of the Japanese economy was very disappointing, which leaves no chance at all that the Bank of Japan will switch to hawkish rhetoric. GDP contracted by 3% in the third quarter, with a forecast of -0.8%, and investments in fixed assets also suffered a lot, declining by 3.8% (forecast -0.6%). It is clear that firms are reluctant to increase production volumes, or they cannot do so due to shortages of components, supply chain disruptions, high prices for raw materials and labor, etc. USDJPY reacted mildly positively to the data, as with such data it is increasingly difficult for the Bank of Japan to move to lower monetary stimulus level.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Gold heads for a test of $1900


For the first time in a while, a threat of covid restrictions becomes an overriding market theme again. Austria has announced a new lockdown, Germany could follow suit. The Swiss franc, dollar, yen led the growth in FX on Friday. At the same time, the yen, traditional safe-haven asset, rallies against USD which adds to the case that risk-off becomes again the key driver of market moves. Risk assets are under pressure, while still minor, European indices lost about half a percent. Oil prices are pulling back on rising energy consumption risks. Money markets are cutting rates on tightening the ECB's policy in 2022, which is not surprising, because the risks of new restrictions are now primarily concentrated in the Eurozone. Gold is at its highs since June and after the key trendline has been broken, it consolidates in the wedge pattern, likely indicating preparations for a new rally targeting next resistance at $1900- $1910:

The strengthening of the dollar this week proved to be more or less stable, as data on the US economy continues to stand out. Of course, we are talking about the data on retail sales, which significantly exceeded the forecast. In particular, core retail sales jumped 1.7% MoM against the 1.0% forecast. The indicator shows positive growth rates for the third month in a row, pointing to an impulse in consumer spending, which forces investors to think about the growth of inflation risks in the American economy:

A $1.4 trillion fiscal spending package over the next 10 years, which may soon be passed by the US Congress, should have reflationary consequences for the economy, so the dollar is now following the news from Congress. If the spending package is approved, market participants may reconsider the pace of the Fed's QE curtailment and rate hikes, since the task of economic stimulus (at least part of the task) will be taken over by fiscal policy.
The UK retail sales data also exceeded expectations, but the GBP hardly got any relief from that. Nonetheless, the GBP is holding better than the EUR this week as the chances of a rate hike by the Bank of England increase in December. Excluding fuel, monthly sales growth was 1.6%, exceeding the forecast by as much as 1%.
Given that European countries have not been able to dodge the new wave of covid despite the high rates of vaccination, the main risk for this situation is an increase in covid hospitalization rates in the United States. If the country is swept by a new covid wave, a full-fledged risk-off will most likely begin in the markets and it will be possible to forget about policy tightening from major central banks next year.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Technical pullback looms in EURUSD


The dollar rises a new high of this year (96.50 on DXY) amid Biden’s decision to extend the term of the current Fed Chairman Powell. Considering that Powell's main rival, Lael Brainard, is a champion of soft credit policy, the news had a positive effect on the dollar and a negative effect on the US sovereign debt, since fixed income definitely priced in the risk of the Fed changing its monetary policy to softer one under the new head so there was a retreat of those expectations. The yield on 2-year bonds increased by 6 bp, on 5-year bonds - by 7 bp. (new highs since the beginning of the pandemic), 10-year bond yields also rose, but local high of 1.70% hasn’t been challenged yet. Yields at the near end of the yield curve are predominantly responsive to news related to the Fed, while those at the far end to the news related to inflation.

In the Eurozone, consumer confidence fell by 2 points to -6.8 points in November. Historically, a value of -5 points characterizes a fairly high level of consumer confidence, so we can talk about a possible tipping point in the positive trend:

Covid and new lockdowns in the EU are hitting consumer confidence, and market participants are likely to revise their forecasts for consumer spending growth this quarter. Accordingly, this will affect expectations related to when the ECB will phase out PEPP and start raising rates. Angela Merkel said yesterday that the current wave of covid is worse than previous ones and urged local authorities to impose tougher social restrictions. There is a risk that the rest of the EU will also be forced to return some of the restrictions by Christmas, despite the fact that their vaccination rates is higher than in Germany and Austria. Naturally, the current forecasts for the growth of the Eurozone are under threat, and the Euro is looking towards new lows.

Nevertheless, from a technical point of view, EURUSD is overbought, the RSI on the daily timeframe has dropped to 26 points. The last time such an intensity of decline was observed in February 2020 and a pullback is probably not far off:

Consolidation prevails in the foreign exchange market today. The wait-and-see attitude may remain in place until the release of minutes of the Fed's November meeting on Wednesday. The US economic calendar includes Markit reports and the Richmond Fed survey.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Too early to bet on rebound


On Monday, risk assets rebounded as reports over the weekend suggest that the bout of covid hysteria on Friday could be an overreaction. Air travel halts have apparently eased off over the weekend, while the WHO and South African researchers alleviated concerns with a statement that there are no evidences yet that the new covid strain is more dangerous than dominating delta strain. In this regard, the flow of negative news for the market, mainly related to new shocks in air transportation, is likely to slow down this week.

Nevertheless, it is too early to say that correction is over - the lack of reliable data on the new strain should keep risk appetite largely subdued this week. According to the WHO, it will take from several days to several weeks to understand whether a new variant of the virus is more aggressive and resistant to vaccines.

With regard to contagiousness, there is a reason for concern. South Africa saw a jump in reported cases of covid in November before the news about the new strain hit the wires, which may be indirect evidence that the virus is more easily transmitted from person to person:

New updates on covid, important for the markets, will appear today - Britain will gather ministers of the Ministry of Health of the G7 countries to discuss options for response, in the evening Biden will deliver a message. It should help to understand the readiness of the governments to take painful preventive decisions.

A barometer of expectations for a tightening of the Fed's policy - long-term rates, halved declines on Monday thanks to the relief rally. The yield on 10-year Treasury bonds rose 7 basis points to 1.54%, and the yield on 2-year bonds also gained about the same amount. European markets rose cautiously – gains do not exceed 1%, and it’s difficult to expect more. The optimism of buyers in the oil market is now mainly based on rumors that OPEC will postpone the planned hike in production by 400K barrels in January, but if we see more reports more countries opted to close borders, a larger drop cannot be avoided.

Noteworthy reports this week are Germany's CPI in November (slated for release today), ADP and NFP US November report. In addition, the first two days of the week are full of speeches from Fed representatives (Powell, Williams). Markets are unlikely to be able to react in cold blood to the comments which may touch on the topic of the new strain, as this will call into question the Fed's intentions to accelerate the phasing out of stimulus measures (QE). In general, one way or another, trading in the market this week should be reduced to reactions to news associated with covid, and should be characterized by more or less homogeneous risk-off/risk-on.

There is a risk of further decline in EURUSD, since Europe’s bullish rate expectations are under pressure due to recent trend to reinstate lockdowns, besides, it is geographically closer to South Africa and, if the new virus is indeed infectious, a new wave may hit it earlier than the United States. Considering the dollar index (DXY), the pullback after strong growth sets the stage for a further rally towards 97.70, where the next key resistance may reside:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

EURUSD looks vulnerable on dampening covid risk, aggressive Fed



Markets continue to price in a positive view on how the story with the new covid strain will unfold. In addition to the positive statements of influential health officials in leading countries such as the US, it is also useful to look at the daily cases data in the country where the strain was originally identified in order to see the dynamics of the spread of a strain that is supposedly “resistant to existing vaccines”. We are talking about South Africa, and the curve of daily cases there looks like this:

Actually, it is clear that after the surge in the incidence against the background of news about the new strain, there wasn’t any concerning development of the growth trend. The incidence rates remain high, but keep within 15 thousand cases per day.

Zerohedge provides the following interesting chart that shows how the markets are quickly discounting the threat posed by the new strain. This is the ratio of the recovery stocks index to the index of stocks that rallied during social restraints (the so-called stay at home stocks). In about two weeks, the decline in this ratio was fully recouped:

The VIX opened with a gap down more than four points in premarket, indicating strong bullish momentum confirmed in the US index futures which are currently gaining strength.

Given the growing speculation that the Fed will step up with withdrawal of stimulus in the near future due to strong pro-inflationary factors (mainly wage pressures), the balance of risks for EURUSD is increasingly shifting downward. The differential of rates on short-term bonds of the US and Germany has turned to growth again and is approaching a local recent maximum and is likely to break through it soon. The growing differential factor is the main bearish driver for EURUSD now. From a technical point of view, the vulnerable level is the lower border of the trend channel - the level 1.111, the rebound from the previous point of contact with the channel has already been completed, the risks associated with the new strain are mitigated, and the increasingly aggressive position of the Fed against the background of the moderate position of the ECB will most likely continue to provide downward pressure on the pair:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

EURUSD May Continue Decline Ahead of ECB And Fed Meetings Next Week



Unfavorable widening of the short-term rate differential has recently acted as the main driver of EURUSD weakness. The pressure on the common currency also stems from increasing carry-trade activity of European investors corresponding with fading pandemic risk. The ECB should deliver an unlikely hawkish surprise at the meeting next week to tip the balance in favor of a strong euro. So far, Euro does not look overbought despite the strong downtrend and fresh lows are possible.

The news about the omicron initially supported the euro due to the flight of carry-trade European investors from risk assets abroad. Now the bears are gradually withdrawing the bet that the omicron risks will materialize, the yield hunting is gaining momentum again, along with this, the downward risks for EURUSD starts to mount again.

There is one more factor of the Euro shorts and it is the recent revision of growth forecasts for the Eurozone due to restrictions in Germany and other European countries. Markets may be pricing European assets with a higher likelihood of restrictions than in the US due to higher covid risks, which ensures upward pressure in yield differential. Recently, the correlation of the latter with the EURUSD has risen, which suggests that sovereign bond capital flows may be playing the main role in driving Euro downtrend against the US currency.

Due to many dovish risks priced in the Euro the sensitivity of EURUSD to the statements of the ECB may turn out to be asymmetric - statements that the bank will not rush to raise rates will be largely ignored, but an unexpected signal that the ECB is going to catch up with the Fed in plans to curtail stimulus measures, on the contrary, may create the ground for a EURUSD reversal. Next week, meetings of both central banks will take place and a surprise is expected from the Fed in the direction of a greater tightening of policy, at the same time, there are no such expectations for the ECB meeting. Consequently, the markets will most likely now begin to factor in an even greater widening of the bond yield differential following the meetings, therefore, despite attempts to gain a foothold above 1.13, EURUSD is vulnerable to further decline in the first half of next week.

From a technical point of view, the latest COT data shows that the aggregate net short position of the Euro against the G10 currencies is still far from extreme values and there is room to sell. In turn, the technical analysis for the pair indicates the persistence of strong short-term resistance at 1.137 (two previous peaks on November 18 and 30), potential selling target is the lower border of the current downtrend (1.113 mark):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Fed’s bullish surprise this week may pave the way for new highs in USD



This week is full of event risks thanks to a number of central banks in developed and EM economies holding their policy meetings, suggesting a high chance of significant market shifts in FX. Key among them is undoubtedly the FOMC policy decision. Broad-based greenback rally on Monday suggests expectations are building up that the Fed will most likely capitulate due to persistently high inflation and accelerate bond purchase tapering. There is a growing risk of policy lag this week between the Fed and central banks with low propensity to hike rates (CHF, EUR) which may have profound FX implications. It will also be interesting to look at the updated Fed dot plot as the shifts in FOMC outlook regarding rates are often strong catalysts of USD trends (recall USD bullish reversal in June). Assuming that the dot plot will indicate the median forecast of two rate hikes (instead of one), money market rates in the US will be forced to adjust upward again, which could pull the dollar along with it.

It is also worth noting an interesting technical trend continuation pattern, which is formed by the dollar index - the "triangle":

If we assume that the uptrend will continue, the nearest target where resistance can be expected is the level of 97.70.

As for the Bank of England meeting this week, the risk of disappointment is high. In November markets priced in a December rate hike due to inflation threat similar to the one in the US, however closer to the meeting the chances of such an outcome began to dwindle. Particularly discouraging was the PM Johnson's warning that Britain could face a wave of new cases due to the spread of Omicron in the country while the head of the Ministry of Health said that there is no certainty that the government will keep schools open. It is clear that the central bank cannot but take these concerns into account.

If the British Central Bank disappoints this week, postponing the rate hike until better times, in combination with the aggressive Fed, this could mean that the GBPUSD fall may accelerate and bears may start to target the next important support at 1.30. Buyers weren't particularly resisting when GBPUSD tested the lower bound of the main downtrend, the 1.3150-1.32 zone, last week:

At the ECB meeting, rather moderate expectations are formed: the regulator seems adamant in its view that inflation peaks by the end of 2021 (albeit higher than expected) and starts to decline in 2022. Accordingly, there is no outlook about early rate hikes. It is worth noting that the market as a whole agrees with the ECB in its opinion on inflation: Bloomberg experts polled in December also that suggest inflation might have peaked in the Eurozone that’s why there is no need to rush for the ECB.

Accordingly, the fate of EURUSD is likely to be decided by the Fed this week, since no surprises are expected from the European Central Bank. EURUSD looks set to resume downtrend targeting 1.10:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Surging US inflation expectations suggest the Fed may act big in December


The Fed’s decision time looms and markets appear to be increasingly sensitive to inflation reports from the US, the predictive power of which, regarding the policy of the Central Bank, is increasing. Suffice it to recall that the moderate CPI report for November (no surprise on the side of acceleration) disappointed buyers of the dollar, causing a decline in the US currency index from 96.40 to 96.20 and a positive reaction of stock indexes. At the same time, yesterday's NY Fed report on consumer expectations raised the stakes on the hawkish decision again, disappointing equity markets. The report showed that inflationary expectations of US households rose to shockingly high levels in November. Household inflation expectations for the year ahead jumped even higher, to 6%:

Inflation expectations affect future actual inflation, so it is important for the Fed to keep them under control - not to let them fall or soar too much. As we can see, so far it is not quite successful and the risk of an abrupt shift in the Fed’s policy grows. The report made a negative impression on markets, the major US stock indexes closed in the red yesterday, index futures again tend to decline today due to concerns about tougher restrictive measures in the monetary policy.

Employment growth in the UK fell short of expectations, amounting to only 149K instead of 228K. At the same time, wage growth beat forecasts - 4.9% YoY against 4.6%. The British economy, it seems, is facing the same problem in its recovery as, for example, the United States - a labor shortage due to the effect of hysteresis (long “idle” of the labor force). Consequently, firms are now spending more on wages, which poses the risk of higher end prices in the future, a strong if not key argument in favor of the Bank of England's unexpected rate hike this week. However, fragility of the recovery, increased risk of a surge in new infections due to the new strain speaks in favor of maintaining the stimulus bias in monetary policy, at least for several more months. In addition, considering employment in dynamics, it can be seen that the momentum in employment seems to be dying out, and with it, the pressure in wages may begin to subside:

The pound, as we can see, wavers in anticipation of the BoE decision, GBPUSD is consolidating near the 1.32 mark, bracing for an aggressive Fed maneuver on Wednesday. Against the euro, the pound is building up its advantage in a moderate way, the pair is “moving” in the channel with a downward slope, the focus is on a repeated test towards the lower parallel to the 0.8450 area, and then potentially to the 0.8350 area:

The rapid decline to the 0.8350 area is likely to require the Bank of England to unanimously vote for a rate hike and play down the risks of the Omicron strain on activity and, in addition, hint at a rate hike in February. Nevertheless, the base scenario remains the option where the Central Bank does not touch the rate at the next meeting, but hints at a February increase. In this case, the decline in EURGBP is likely to be moderate.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.