Inflation across the developed world is raging higher and the Fed may be about to signal the monetary tightening policy that others will follow. This morning the odds of a Bank of England rate hike rose, and this is supporting the pound from further declines.
If the Fed comes out less hawkish than expected, we could see a major repricing in the following hours.
The world’s second-largest economy is showing signs of reduced consumption as retail sales for November on a year-over-year (YoY) basis dropped by a percentage point to 3.9% and came under market expectations of 4.6%. Thankfully as the factory of the world, China’s Industrial Output YoY rose to 3.8% in November from the previous reading of 3.5%. This second consecutive rise in Industrial Output is indicating that the bottom may be in from the declines from when output surged and then peaked at the start of 2021. Electrical machinery, agricultural and food processing were the main drivers in November. JP Morgan has come out this morning and revised their Chinese GDP forecast for Q4 to 4.9% up from 4.0%.
The forex heatmap is a big mix today with no clear risk-on or off direction as we all wait for the FOMC meeting tonight. After the mixed data points out of China in the overnight session the yuan is relatively weak against most G-10 currencies though it is doing better against the USD, CHF, and CAD.
There will be a lot of interest in the US dollar crosses today, not just because of the FOMC meeting, but also because the US House voted 221-209 to raise the debt limit by $2.5 trillion, removing a roadblock to the administration's spending plans. Treasury Secretary Yellen's deadline of the 15th of December had warned that the US might be near its first-ever default if not extended at the 11th hour. We should be able to leave this problem aside until 2023 now.
The GBPUSD rallied ahead of the London session, as UK inflation data readings were hotter than expected. The UK CPI YoY for November registered a growth of 5.1% against the expected 4.7%. Based on this, traders have changed their perception from a 46% chance that the BoE will hike by 15 basis points to now a 50%-57% chance. The momentum in Cable is clearly to the downside and the first test of this morning’s rally will come from the dynamic resistance of the daily 20 EMA. Currently, with expectations of a rate hike now at evens, the UK Gilt market is dropping, yields are rising and this is supporting a bullish pound.
The UK FTSE100 is continuing its decline as economic activity is affecting the 100 constituents. The biggest fallers are currently Rentokil, Ocado, Next, King Fisher, and Rio Tinto. Sales and marketing company DCC Plc is doing rather well though today having fallen -5.43% for the week.
The American Petroleum Institute (API) reported yesterday that crude oil stockpiles declined by 815,000 barrels in the week ending December 10. The demand may be there, and traders are keeping the Brent prices with a tight range. $73.70 is old support and should act as resistance but $72.70 is also support. The first of these levels to go should give a better indication of the continued direction.
The USDCAD is using the opportunity of a relatively weak energy market coupled with a strengthening US dollar and is about to attempt a breakout of the recent trading range. 1.2890 is a key level with August 2021 swing high as the next upside target.