Weekly Forex Review & Outlook 12-Dec-2022: A big one for top-tier central banks

Policy decisions from the Bank of England and European Central Bank follow on Thursday.

A review of last week

Most of the major currency pairs have traded roughly sideways over the past week (or as sideways as forex ever can be), relatively cautious and keeping some powder dry ahead of the big central bank events this coming week.

Through the prism of the US dollar, the last week started with the greenback in demand to help the dollar index (DXY) climb away from the previous week’s multi-month lows, but Wednesday and Thursday it was the opposite story and most of the gains were given up.

The euro-dollar started around 1.053 last Sunday and this Sunday having scraped only as low as 1.044 along the way.

Cable started last week at 1.228 and after slipping to 1.210 on Tuesday night, started the new week yesterday at 1.222.

GBP/EUR, after starting the week at around 1.66, mostly traded in a channel between 1.64 and 1.58, before picking up on Friday.

The Japanese yen, having fought its way to 134 against USD at the start of the month, found a level in a channel around 136 to 138.

Other major pairs have been showing some more noticeable directional changes, with GBP trending lower against the Aussie and Kiwi dollars, but up firmly against NOK, CAD, HUF, MXN and JPY.

In fact the NZD has had a strong week on pretty much every major pair, with the Reserve Bank of NZ one of the central banks having early on the cycle labelled its aggressive pace of rates hikes as a ‘least regrets’ policy.

With the rate hike at its last meeting on November 23 taking its cumulative interest rate rise to 400 basis points since last October, the RBNZ is not due to meet again until February 22.

AUD has similarly been on the up against everyone apart from its antipodean neighbour, following a an eighth consecutive hike from the RBA last week.

NOK has been a big loser in the week, down over 1% in most major pairs, nearer 2% against US and Down Under dollars and Swiss franc.

Week ahead

Moving to this week it’s a big one for top-tier central banks. And even though the interest rate hikes are expected to be smaller than last time, there is potential for some sizeable currency swings in coming days.

The US Federal Reserve’s Federal Open Market Committee meeting on Wednesday will be the star at the top of the festive tree.

But Tuesday’s US CPI number could see the inflation elves throw an impish spanner in the works.

After four consecutive 75bps hikes, US CPI is still lingering above 7% and the jobs market remains tight.

The FOMC is virtually nailed-on to step down to a 50bps hike on Wednesday as the committee has stated as much, saying it has made “substantial progress” so far.

But the market saw the softer core CPI data last time and has started to price-in that policymakers will stop hiking and ‘pivot’ from the start of next year, despite Fed head Jerome Powell and other speakers generally remaining fairly hawkish and even insisting that the “ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting”.

This means there is potentially a lot of unreleased tension that could explode in currency markets in the days leading up and immediately after the decision.

Traders and economists will zero-in on the ‘dot plot’ showing the pace of future rate hikes and the expected peak interest rate, as well as the latest economic projections.

Policy decisions from the Bank of England and European Central Bank follow on Thursday.

The BoE last month followed a succession of 50bps rate raises with its first ever 75bps hike, while the ECB has made two consecutive 75bps hikes.

GBP is in a stronger place since the last meeting and Threadneedle Street is expect to cap off a tumultuous year by going back to its more familiar 50bps rate increases, which will give British citizens an unwanted Christmas present of a 3.5% base rate.

Likewise, the ECB, which has tightened rates by 2% since July, is also seen downshifting to a 50bps hike but remaining fairly hawkish in terms of communications.

Other macro data in the week includes the UK jobs numbers on Tuesday and inflation on Wednesday, with the latter seeing CPI hitting a multi-decade high of 11.1% last time.

Elsewhere, there will be a number of European sentiment indicators, including the ZEW survey for Germany and the Eurozone on Tuesday, and manufacturing confidence in France on Thursday.

Ahead of the Bank of Japan's meeting next week, this Tuesday we have the quarterly Tankan survey of business, where many economists expect a deterioration in business conditions for large manufacturers and flat growth for large non-manufacturers.

Tokyo will also release tax reform proposals too.

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