<p class=“MsoNormal“>UPCOMING
EVENTS:</p><p class=“MsoNormal“>Monday: US
NAHB Housing Market Index.</p><p class=“MsoNormal“>Tuesday: PBoC
Rate Decision, BoJ Rate Decision.</p><p class=“MsoNormal“>Friday:
Japan CPI, US PCE.</p><p class=“MsoNormal“>Last week we
got two important events: the US CPI and the FOMC Policy Decision. The <a target=“_blank“ href=“https://www.forexlive.com/news/us-november-cpi-71-yy-vs-73-expected-20221213/“ target=“_blank“ rel=“follow“>CPI
missed expectations</a> and caused some risk-on in the market that
lasted for a very short time as the market started to look forward to the <a target=“_blank“ href=“https://www.forexlive.com/centralbank/federal-reserve-hikes-50-basis-points-as-expected-20221214/“ target=“_blank“ rel=“follow“>FOMC
Policy Decision</a>. In fact, the market was right in being defensive going
into the event. The Fed was more hawkish than expected and this
hawkishness is depicted in three details:</p><p class=“MsoListParagraph“>· Following
the miss in the CPI report, Fed members had the chance to revise the Dot Plot
until Tuesday evening, so that is after the CPI report, BUT they chose not
to do it.</p><p class=“MsoListParagraph“>· The <a target=“_blank“ href=“https://www.forexlive.com/centralbank/fomc-dot-plot-and-central-tendencies-from-dec-2022-meeting-eoy-2023-48-20221214/“ target=“_blank“ rel=“follow“>Dot
Plot</a> showed an overwhelming consensus from the Fed members in hiking rates
to 5% or higher and remaining higher for longer as no cuts are expected
for 2023 and a 4.1% rate is expected in 2024. </p><p class=“MsoListParagraph“>· <a target=“_blank“ href=“https://www.forexlive.com/centralbank/powell-opening-statement-we-have-more-work-to-do-20221214/“ target=“_blank“ rel=“follow“>Fed
Chair Powell sounded resolute</a> in keeping at it and pushed back against
expectations for rate cuts in 2023. </p><p class=“MsoNormal“>This
resulted in risk-off across the board the day after. The thing is that the
Fed cannot be confident in easing their policy until they have a strong view
that inflation is indeed falling back to their 2% target. The key here may be
the labour market as they continue to repeat that it’s extremely tight. They
want to see the unemployment rate to pick up notably. The problem is that
they always underestimate the eventual pain in the labour market as you can see
in the chart below:</p><p class=“MsoCaption“>Chart from TS Lombard</p><p class=“MsoNormal“>So, in the
end, this leads us to expect a deep recession coupled with a possible
overtightening from the Fed. These two things are the very worst for risk
assets and we should therefore see a flight to safety, which in the currencies
space results in USD buying. </p><p class=“MsoNormal“>This week is
all about a continuation from the previous one or a choppy price action as we
head into Christmas Holidays. </p><p class=“MsoNormal“>Monday: We will see
the latest NAHB Housing Market Index report. This index has fallen for 11
straight months and it’s sitting at the 33 level, which is way below the 50
neutral level that divides expansion from contraction. The housing market is
sensitive to interest rates and it’s also a leading indicator for housing
starts. This index is pointing to some really ugly things going forward. It’s
expected to show a little increase to 36 from the 33 level, but since the
fundamentals have not changed and the Fed wants to keep at it, the trend is
still heavily skewed to the downside.</p><p class=“MsoNormal“>Tuesday: The PBoC is expected to hold the rates unchanged
for both the 1Y LPR at 3.65% and the 5Y LPR at 4.30%. There’s a chance though
that the 5Y LPR could be lowered as the current government policy is to support
the economy. That may result in some very short-term risk-on sentiment but
ultimately should be a fade as the whole world is heading into a deep recession
with central banks still tightening. </p><p class=“MsoNormal“>The BoJ is
expected to leave policy unchanged and maintain its dovish stance. There was
also a report over the weekend that “Japan’s government is set to revise a
decade-old joint statement with the Bank of Japan (BoJ) that commits the
central bank to achieve its 2% inflation at the earliest date possible”.
With the revision, Prime Minister Fumio Kishida will aim at making the BOJ’s 2%
inflation target a more flexible goal with room for allowance, Kyodo reported.
The new statement could remove the phrase „at the earliest date
possible,“ or change the language to clarify that the 2% inflation
target is a medium- to long-term goal rather than one that needs to be achieved
quickly, Kyodo said. There’s some speculation in the market that once
Governor Kuroda departs in April next year, the BoJ may start to exit its
ultra-loose policy. </p><p class=“MsoNormal“>Friday: Japan CPI is
expected to remain unchanged at 3.7% for the Y/Y headlinefigure and to
edge up to 2.7% Y/Y from the prior 2.5% for the ex Food and Energy reading. The
BoJ has been pretty much ignoring the rising inflation figures but since we
are near the Fed peak in tightening and the BoJ may exit its ultra-loose policy
as Kuroda departs, the JPY should have bottomed and a “buy on dips” as the
global recession deepens. </p><p class=“MsoNormal“>The US PCE
is expected to show a dip to 5.3% from the prior 6% for the headline Y/Y figure
and a dip to 4.6% from the prior 5% for the Core Y/Y reading. The M/M figures
are expected to show an unchanged reading of 0.3% for the headline reading and
an increase of 0.4% for the Core reading. The PCE shouldn’t be a
market-mover as we already got to see the CPI report and the FOMC repeated its
commitment in keeping at it. </p><p class=“MsoNormal“>Wish you all
a Merry Christmas and a Happy New Year!</p><p class=“MsoNormal“>This article
was written by Giuseppe Dellamotta. </p>
EVENTS:</p><p class=“MsoNormal“>Monday: US
NAHB Housing Market Index.</p><p class=“MsoNormal“>Tuesday: PBoC
Rate Decision, BoJ Rate Decision.</p><p class=“MsoNormal“>Friday:
Japan CPI, US PCE.</p><p class=“MsoNormal“>Last week we
got two important events: the US CPI and the FOMC Policy Decision. The <a target=“_blank“ href=“https://www.forexlive.com/news/us-november-cpi-71-yy-vs-73-expected-20221213/“ target=“_blank“ rel=“follow“>CPI
missed expectations</a> and caused some risk-on in the market that
lasted for a very short time as the market started to look forward to the <a target=“_blank“ href=“https://www.forexlive.com/centralbank/federal-reserve-hikes-50-basis-points-as-expected-20221214/“ target=“_blank“ rel=“follow“>FOMC
Policy Decision</a>. In fact, the market was right in being defensive going
into the event. The Fed was more hawkish than expected and this
hawkishness is depicted in three details:</p><p class=“MsoListParagraph“>· Following
the miss in the CPI report, Fed members had the chance to revise the Dot Plot
until Tuesday evening, so that is after the CPI report, BUT they chose not
to do it.</p><p class=“MsoListParagraph“>· The <a target=“_blank“ href=“https://www.forexlive.com/centralbank/fomc-dot-plot-and-central-tendencies-from-dec-2022-meeting-eoy-2023-48-20221214/“ target=“_blank“ rel=“follow“>Dot
Plot</a> showed an overwhelming consensus from the Fed members in hiking rates
to 5% or higher and remaining higher for longer as no cuts are expected
for 2023 and a 4.1% rate is expected in 2024. </p><p class=“MsoListParagraph“>· <a target=“_blank“ href=“https://www.forexlive.com/centralbank/powell-opening-statement-we-have-more-work-to-do-20221214/“ target=“_blank“ rel=“follow“>Fed
Chair Powell sounded resolute</a> in keeping at it and pushed back against
expectations for rate cuts in 2023. </p><p class=“MsoNormal“>This
resulted in risk-off across the board the day after. The thing is that the
Fed cannot be confident in easing their policy until they have a strong view
that inflation is indeed falling back to their 2% target. The key here may be
the labour market as they continue to repeat that it’s extremely tight. They
want to see the unemployment rate to pick up notably. The problem is that
they always underestimate the eventual pain in the labour market as you can see
in the chart below:</p><p class=“MsoCaption“>Chart from TS Lombard</p><p class=“MsoNormal“>So, in the
end, this leads us to expect a deep recession coupled with a possible
overtightening from the Fed. These two things are the very worst for risk
assets and we should therefore see a flight to safety, which in the currencies
space results in USD buying. </p><p class=“MsoNormal“>This week is
all about a continuation from the previous one or a choppy price action as we
head into Christmas Holidays. </p><p class=“MsoNormal“>Monday: We will see
the latest NAHB Housing Market Index report. This index has fallen for 11
straight months and it’s sitting at the 33 level, which is way below the 50
neutral level that divides expansion from contraction. The housing market is
sensitive to interest rates and it’s also a leading indicator for housing
starts. This index is pointing to some really ugly things going forward. It’s
expected to show a little increase to 36 from the 33 level, but since the
fundamentals have not changed and the Fed wants to keep at it, the trend is
still heavily skewed to the downside.</p><p class=“MsoNormal“>Tuesday: The PBoC is expected to hold the rates unchanged
for both the 1Y LPR at 3.65% and the 5Y LPR at 4.30%. There’s a chance though
that the 5Y LPR could be lowered as the current government policy is to support
the economy. That may result in some very short-term risk-on sentiment but
ultimately should be a fade as the whole world is heading into a deep recession
with central banks still tightening. </p><p class=“MsoNormal“>The BoJ is
expected to leave policy unchanged and maintain its dovish stance. There was
also a report over the weekend that “Japan’s government is set to revise a
decade-old joint statement with the Bank of Japan (BoJ) that commits the
central bank to achieve its 2% inflation at the earliest date possible”.
With the revision, Prime Minister Fumio Kishida will aim at making the BOJ’s 2%
inflation target a more flexible goal with room for allowance, Kyodo reported.
The new statement could remove the phrase „at the earliest date
possible,“ or change the language to clarify that the 2% inflation
target is a medium- to long-term goal rather than one that needs to be achieved
quickly, Kyodo said. There’s some speculation in the market that once
Governor Kuroda departs in April next year, the BoJ may start to exit its
ultra-loose policy. </p><p class=“MsoNormal“>Friday: Japan CPI is
expected to remain unchanged at 3.7% for the Y/Y headlinefigure and to
edge up to 2.7% Y/Y from the prior 2.5% for the ex Food and Energy reading. The
BoJ has been pretty much ignoring the rising inflation figures but since we
are near the Fed peak in tightening and the BoJ may exit its ultra-loose policy
as Kuroda departs, the JPY should have bottomed and a “buy on dips” as the
global recession deepens. </p><p class=“MsoNormal“>The US PCE
is expected to show a dip to 5.3% from the prior 6% for the headline Y/Y figure
and a dip to 4.6% from the prior 5% for the Core Y/Y reading. The M/M figures
are expected to show an unchanged reading of 0.3% for the headline reading and
an increase of 0.4% for the Core reading. The PCE shouldn’t be a
market-mover as we already got to see the CPI report and the FOMC repeated its
commitment in keeping at it. </p><p class=“MsoNormal“>Wish you all
a Merry Christmas and a Happy New Year!</p><p class=“MsoNormal“>This article
was written by Giuseppe Dellamotta. </p>
This article was written by ForexLive at www.forexlive.com.