13 December 2022

Weekly Outlook - Major central banks take centre stage

Technical Analysis

The optimism from Chinese authorities announcing the relaxation of some covid measures was overshadowed by US CEO commentary warning of an economic slowdown as rates rise. Focus now on major central banks this week, which are expected to raise rates in the year's final meeting.

Top 3 events to keep an eye on

  • Fed, BOE and ECB interest rate decisions

  • US and UK CPI figures the day before the central banks meet

  • Chinese industrial production 

Fed's hike might be hanging on the inflation print

Powell's comments at the Brookings Institute just ahead of the start of the pre-rate decision blackout were interpreted as confirming that the Fed would do a double hike. But data since then supports the view the economy is still hot. And if inflation comes in hotter than expected on Tuesday, then expectations become as hawkish to beg the question of how much of the FOMC price action might get priced in post-CPI.

Momentum continued to wane for the eurodollar anyway, and $1.06 has formed a solid ceiling for the time being. If the CPI comes in softer than expected ahead of the FOMC, the pair could initiate an upward legging towards $1.08, contingent on its whereabouts on Tuesday. $1.05 is a level of confidence in the very short term, and its breach could send the pair towards $1.03, provided inflation data beat forecasts. What happens after the FOMC remains to be seen.

Tradingview Chart: EUR/USD

ECB forecast to hike less due to softening CPI

The consensus about the ECB notched to a 50 bps hike after European inflation figures for November surprised to the downside. In comments just before the start of the blackout period, Lagarde repeated that concerns about the economy remained, though she was committed to bringing inflation down to target.

BOE expected to go "double" with a 50bps hike

The expectation that the BOE will do a "double" rate hike at the next meeting is tempered by the publication of CPI figures ahead of the meeting. Inflation is expected to keep rising, justifying the expectation for the BOE to be more hawkish despite being already in recession. Monday's GDP figures will provide more clarity on that end.

If there is some respite to be noted upon a pound counterpart, that's on loonie. GBP/CAD momentum keeps spiking to overbought territory, and every pullback has been bought,  encouraging further bids towards 1.70 regardless of what happens with BOE. However, the deviation is getting wider, too, with 1.65 a critical floor to defend. Failing to do so could clear the path to 1.6375, and with a dovish BOE, it could slide there faster.

Tradingview Chart: GBP/CAD

China to report slowing of industrial production

Thursday sees a host of Chinese high-frequency data, expected to paint a sobering picture after November was infused with uncertainty due to protests and changes in covid policy that hadn't manifested. House prices are forecast to turn negative, while retail sales are expected to fall further into the red.

The Hong Kong 50 index has had a decent run up to the 20k handle, and it could slide to 18500 just for a pullback. The last upward leg to the stronghold printed without a significant uptick in momentum that the peak could be near, if not in already. Getting past 20550 could see the index reaching the 22500 top before reserving even for a mere pullback. Its price action will depend on the Chinese data, but only partially. The other part will likely lean on how the covid situation unravels in China. 

Tradingview Chart: HK50

Top stories in review

  • Risk appetite failed to pick up after softening covid measures in China still left uncertainty about the policy going forward. 

  • Several CEOs of major US companies warn of recession risk in the coming year.

  • Chinese trade surplus shrank, and so did the US trade deficit in a sign of slowing global trade.

  • Strikes are growing in the UK, with ambulance drivers expected to walk out for two days at the end of the month.

Major calendar events for Dec 12-16 (GMT)

Source: investing.com

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