ACM Update 12-12-22
England have swapped the sun of Qatar for winter back home after a Quarter-Final defeat. The quote from commentary on the pivotal moment “We needed Gary Lineker but got Chris Waddle” may now rank alongside “they think it’s all over” but for all the wrong reasons.
Cable (Sterling/Dollar) is now nestled in the 1.22s. You can view the recent movements in the graph below –
Global inflation is beginning to show early signs of peaking and combined with weaker growth data, many central banks have signalled their intention to slow the pace of rate tightening and potentially arrive at a lower terminal rate.
Last week’s market activity occurred towards the end when larger-than-expected US wholesale inflation data for November crossed the wires. It also didn’t hurt the University of Michigan consumer sentiment surprised higher as well. Treasury yields gained across the maturity spectrum, reflecting rising hawkish Federal Reserve monetary policy expectations
A 50bp Fed hike is widely expected given high inflation and a tight jobs market, but the market is pricing in a recession, where Treasury yields and a weakening dollar are undermining the Fed’s efforts to dampen price pressures. A hawkish Fed message will likely fall on deaf ears unless the data starts proving the central bank right.
From a Sterling perspective despite higher-than-expected inflation in October, the market expects the Bank of England to revert to a 50bp hike at its December meeting. Gilts are back to pre-budget crisis levels. Sterling has recovered strongly but will struggle to make further gains in a challenging investment environment. The BoE's trade-weighted measure of sterling has recovered nearly 8% from its lows in September and is now trading back to levels seen in early August. It looks as though about half of that rally has come from the improvement in the UK's fiscal credibility since the dark days of September, and the other half has come from the broad sell-off in the dollar, where the US currency makes up about 20% of the BoE's sterling basket.
On a Sterling/Euro perspective I would see 1.18 as toppish going into year end. You can view the recent movements in the graph below.
If you have any EUR requirements, please reach out to the dealing team at Aston and they will be able to walk through technical levels and discuss your specific requirements in detail.
My baseline view would see GBP/USD constrained below 1.25 and EUR/USD under 1.06 while the Fed validates the current trajectory in money markets. A more dovish turn would be a surprise and with seasonals against the dollar in December, both Cable and EUR/USD could spike above resistance towards the 1.2750/ 1.07 area respectively in thin year-end markets.
Notable Economic releases for the week ahead:
Monday UK Manufacturing Production
Tuesday GE CPI, ZEW Survey; UK Claimant Count, Financial Stability Report; US CPI
Wednesday UK RPI, CPI; EU Industrial Production; US FED Policy & Interest rate decision
Thursday SNB Rate decision; UK BOE Rate decision; ECB Rate decision; US Initial Claims
Friday UK GfK Consumer Confidence, Retail Sales; EU PMI; CFTC Net Positions
