FX Majors Weekly Outlook (7 -11 November) | Forexlive
UPCOMING
EVENTS:
Thursday: US
CPI
The last
week we finally got the FOMC Policy Decision. The statement leant on the less
hawkish side mentioning that “the Committee will take into account the cumulative
tightening of monetary policy, the lags with which monetary policy affects
economic activity and inflation, and economic and financial developments”. The
market interpreted that as a hint to a slower pace of hikes as the Fedwatcher
Nick Timiraos has mentioned in his WSJ article the week prior the FOMC meeting.
The market
reacted positively to such development, and we saw risk rally across the board
and the USD getting offered. What ended the party was the Press Conference
where Powell sounded very hawkish. There are three takeaways that Nick Timiraos
highlighted:
1) The Fed
could step down to a slower pace in December even if inflation data don’t
improve much.
2) If there
had been new estimates of the terminal funds rate released, they would have
moved up.
3) Not ready
to talk about a pause.
And then
adding some key lines from Powell:
“The
question of when to moderate the pace of increases is now much less important
than the question of how high to raise rates and how long to keep monetary
policy restrictive.”
“The
risks are asymmetric. If the Fed does too much, it can cut. If it doesn’t
tighten enough, then you’re in real trouble.”
“It is
very premature to be thinking about pausing…Very premature.”
Maybe the
Fed wants to slow the pace of hikes but to counteract the likely easing in
financial conditions it can keep on raising the terminal rate. I’d say that
considering how the market is forward looking, the Fed here is taking a gamble
by slowing the pace of hikes when inflation data has not yet shown meaningful
improvement, even though forward-looking indicators are signalling moderation
in price pressures. The risk is that the market looks more at the slower pace
of hikes than the higher terminal rate and financial conditions ease anyway.
Maybe we already
got a taste of that on Friday when, after the NFP report, the market rallied,
and we saw a big USD dump. Some say it was because of a higher unemployment
rate and some other citing China reopening rumours. The former is said to be a
noisier data compared to payrolls figure (which beat expectations), and the
latter should be seen as more inflationary rather than being good news.
This week will
be all about the US CPI on Thursday. The report is expected to show an increase
of 0.7% M/M from the prior 0.4% and a little dip to 8.1% for the Y/Y figure
from the prior 8.2%. For the Core figures the expectations are for a 0.5% M/M,
down from the prior 0.6% and 6.6% Y/Y which would match the prior reading. The
market is currently split on the likely rate increase in December between 50
bps and 75 bps. This report may not be as important as the one coming days
before the December FOMC meeting, but another hot report should be negative for
risk sentiment and see the USD being bid. On the other hand, a soft report may
see risk rally and USD getting offered.
Stanley
Druckenmiller, who began his career in financial markets back in the 70s and
traded successfully through many cycles, had this to say back in June:
“We’ve never
had a soft landing after inflation has got above 4.5%.”
“Once
inflation gets above 5%, it’s never come down unless the Fed Funds rate is
higher than the CPI.”
“Once
inflation gets above 5%, it’s never been tamed without a recession.”
The market
prices a terminal rate of 5.00-5.25% in Q2 2023 and just for context the market
priced just 75 bps worth of hikes in 2022 back in 2021, and we are already at
400 bps. The market is not always right.
This article
was written by Giuseppe Dellamotta.