After an unexpectedly dovish pivot from Fed Chairman Jay Powell on Wednesday, European and U.S. markets ended another positive week on a very mixed note after New York Fed President John Williams pushed back market expectations for a rate cut as early as March, saying it was too early to even consider such a move.
Williams was followed in his comments by Atlanta Fed President Raphael Bostic who echoed similar sentiments, saying that he expects rate cuts to begin in the third quarter of 2024 if inflation falls as expected.
With the Fed dots indicating that US policymakers saw rates back at 4.6%, this seems more in line with the message the Fed had hoped to deliver on Wednesday, however markets decided to take Powell’s press conference comments and run with them, getting out in front of their skis in the process.
Given where the U.S. economy is right now, it’s surprising that the Fed is said to be starting to think in terms of cutting rates simply because with the economy where it is right now, there’s no need at this point. With Q3 GDP at 5.2%, unemployment at 3.9%, and weekly jobless claims at just over 200k, the risk of a resurgence in inflation is clearly still a concern for some policymakers.
That certainly doesn’t seem to be the case in Europe, where economic activity is stagnant at best and even now the ECB seems reluctant to cut rates, although a reduction in borrowing costs is clearly needed, given that headline inflation is back within touching distance of its 2% target.
The same could be said for the UK, except that wage growth is still running well above 7%, while headline CPI is at 4.6%, although this could come down further in the figures to be released on Wednesday.
As we head into the final week before the Christmas break, trading activity is likely to be somewhat thin and choppy, and while we have seen record highs for the Dow, DAX and CAC 40 in the last week or so, we are still some way off the 2021 highs for the Nasdaq 100 and S&P500.
As for the FTSE100, we’re looking at another year of underperformance after the record highs of mid-February, with the UK benchmark up just over 1% year to date and the FTSE250 not much better.
Due to the relatively subdued nature of Friday’s US close, today’s European open looks set to be a slightly weaker one, with the only data of note being the latest German IFO business survey for December. Given the weak nature of last week’s PMI numbers, it would be surprising to see a significant improvement on November’s numbers, with the current assessment improving slightly to 89.4.
The US Dollar was one of last week’s big losers, driven lower by expectations that US interest rates have peaked and are on their way down, while the Japanese Yen was one of the biggest gainers.
This shift in sentiment will undoubtedly be welcomed by the Bank of Japan, and to some extent helps them with the yen’s weakness ahead of tomorrow’s rate decision. There is now less incentive for them to think about changing their current policy settings, although they may hint at starting to implement some form of change early next year.
EUR/USD – Last week’s bounce to 1.1010 didn’t last long and failed to break through November’s highs at 1.1015/20. We now have support back at the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the July highs at 1.1275.
GBP/USD – The pair briefly broke above the 1.2730 area and the 61.8% retracement of the 1.3140/1.2035 decline, rising to 1.2795 before reversing. The bias remains for further gains while above the 200-day SMA at 1.2520. We also have support in the 1.2590 area.
EUR/GBP – Slipped from the 100-day SMA at 0.8640 last week, with support in the 0.8570/80 area. A move below 0.8580 targets 0.8520.
USD/JPY – Slipped below the 200-day SMA at 142.50 last week, opening up the prospect of a move towards 140.00. We now have resistance at 146.00 and a break below could push us towards 139.20.
The FTSE100 is expected to open 7 points lower at 7,569.
DAX is expected to open 15 points lower at 16,736.
CAC40 is expected to open 3 points lower at 7,594.
