So, what exactly does that mean? Essentially this: Paying more for less

Inflation may be coming down on paper but there remains a major divergence between what consumers are paying and what they are getting in food stores. And ultimately, that trickles down to every spending decision that households will make. If you’re having to pay more for essentials, that leaves less room for non-essential spending. Here’s the chart highlighting that divergence:

Unfortunately, this is a reality faced not just in the UK but in most places around the world. Typically, when prices go up, they don’t come back down even if the costs for the product normalises over time.

In Australia, there is growing backlash on the big jump in grocery expenditure over the last few years although that also owes to a duopoly between Coles and Woolworths. But just take a simple case of purchasing McDonald’s for example. In my country, a Big Mac meal used to cost $3.13 in 2021 but that has now increased to $4.41. That’s a ~41% price jump. And if you look all the way back to 2012, that used to cost just $1.93 (indicating a ~128% price increase).

I’m sure almost everyone can relate on this matter. And I can imagine that being the case in most countries all over the world right now. The real issue here is that no matter what picture central banks and governments are trying to sell, the wage increase of an average worker is most likely not going to cover the increase in prices for something as essential as food.

And the chart above is pretty much highlighting that. While the value of retail sales continue to increase, the trend actually shows that the volume of sales is decreasing when compared to the base level set out in 2019.

So, even with the retail sales beat we’re seeing last month, there are still concerning signs on UK retail spending heading towards the end of the year as highlighted by the CBI report yesterday here.

This article was written by Justin Low at www.forexlive.com.

• To also keep credit growth reasonable

These are token remarks but it looks to be one to tee up deposit rate cuts by major state-owned banks in China as reported earlier here.

This article was written by Justin Low at www.forexlive.com.

The squeeze on UK consumers continue as retailers are reporting a downturn in sales in December, adding to the gloomy outlook heading into next year. The expected sales reading for next month also fell sharply to -41, its weakest since the record low of -62 in March 2021. CBI notes that:

„Strained household finances and higher interest rates continue to take a toll on consumer spending, suggesting that retailers will have to navigate a tough demand environment in the months to come.“

This article was written by Justin Low at www.forexlive.com.

• The Fed left interest rates unchanged as expected at the last meeting with a shift in
  the statement that indicated the end of the tightening cycle.
• The Summary of Economic Projections showed a
  downward revision to Growth and Core PCE in 2024 while the Unemployment Rate
  was left unchanged. Moreover, the Dot Plot was revised to show three rate cuts
  in 2024 compared to just two in the last projection.
• Fed Chair Powell didn’t push back against the strong dovish pricing
  and even said that they are focused on not making the mistake of holding rates
  high for too long, which implies a rate cut coming soon.
• The US CPI last week came in line with expectations
  with the disinflationary progress continuing steady. This was also confirmed by
  the US PPI the day after where the data missed
  estimates.
• The labour market has been showing signs of
  weakening lately but we got some strong releases recently with the US Jobless Claims and the NFP coming
  in strongly.
• The US Retail Sales last week beat expectations across the board as
  consumer spending continues to hold.
• The US Consumer Confidence report yesterday beat expectations across the
  board.
• The latest ISM Manufacturing PMI missed expectations falling further into
  contraction, while the ISM Services PMI beat forecasts holding on in expansion.
• The market expects the Fed to start cutting rates
  in Q1 2024.

GBP

• The BoE left interest rates unchanged as expected at the last meeting
  with no dovish language as they reaffirmed that they will keep rates high for
  sufficiently long to return to the 2% target.
• Governor Bailey pushed back against rate cuts
  expectations as he said that they cannot say if interest rates have
  peaked.
• The latest employment report missed forecasts with wage growth
  coming in much lower than expected and job losses in November.
• The UK CPI today missed expectations across the board,
  which is another welcome development for the BoE.
• The UK PMIs showed the Manufacturing sector falling
  further into contraction while the Services sector continues to expand.
• The latest UK Retail Sales missed expectations across the
  board by a big margin as consumer spending remains weak.
• The market expects the BoE to start
  cutting rates in Q2 2024

GBPUSD Technical Analysis –
Daily Timeframe

On the daily chart, we can see that GBPUSD recently
probed above the 1.2743 resistance but got
smacked back down soon after. The divergence with the
MACD was also
a warning sign of a possible pullback as it often signals pullbacks or
reversals. In this case, the price is pulling back to the key trendline where we
can find the confluence with the
1.2593 support and the 50% Fibonacci retracement level of
the entire fall since July.

GBPUSD Technical Analysis –
4 hour Timeframe

On the 4 hour chart, we can see more closely the
bullish setup around the support zone. This is where the buyers are likely to
step in with a defined risk below the trendline to position for a rally into
new highs. The sellers, on the other hand, will want to see the price breaking
below the trendline to invalidate the bullish setup and position for a drop
into the 1.2374 level.

GBPUSD Technical Analysis –
1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action with the pair trading into the support zone.
If the price breaks above the minor downward trendline, the buyers should
increase their bullish bets into new highs. The sellers, on the other hand,
might want to lean on the minor trendline to position for a downside breakout
with a better risk to reward setup.

Upcoming Events

Today we get the latest US Jobless Claims figures,
while tomorrow we conclude the week with the UK Retail Sales and the US PCE data.

This article was written by FL Contributors at www.forexlive.com.

If you’re still doubting the dollar’s importance in every day use, you probably have to wait another year before people start entertaining that argument. The latest numbers from SWIFT this week shows that global payments are still very much all being done with the greenback and this snapshot is quite compelling evidence of that:

The standout points in the snapshot above is that the euro’s share of global SWIFT payments have dropped to a new low while the Chinese yuan’s share has improved to even surpass the Japanese yen – the first since January 2022. That makes it the fourth most used global currency behind the pound, euro, and dollar.

The yuan’s share improved to 4.6% in November and that is quite an improvement from below 2% when it started off back in January this year. Adding to that, the yuan’s share of payments for trade finance rose to 5.7% in November and that sees it surpass the euro (5.6%) as the second-most used currency for global trade finance.

Both currencies of course still pale much in comparison to the dollar in this space, which continues to hold a share of more than 80%.

So, while we are seeing some interesting shifts among other major currencies, the dollar continues to stand tall on its own. It holds nearly 45% of all global SWIFT payments, making it still the runaway leader as the most used global currency.

This article was written by Justin Low at www.forexlive.com.

The snapshot is as per below:

Based on the above, it’s more so now a question of inflation persistence rather than extremely high inflation. Sure, core prices are still much higher than the snapshot we’re seeing but in general it is also reflecting a similar trend. I mean, it is quite telling when you compare it to the snapshot back in August here:

The most evident case of a drop in headline annual inflation is of course in the euro area, although much of that can be attributed to base effects as high energy prices are phased out. They were of course the most impacted by the Russia-Ukraine conflict last year.

But in general, the softer trend here is what is helping to feed the disinflation narrative and aggressive market pricing on rate cuts in recent weeks. The question now is, will we be able to see that final push towards 2% come sooner rather than later? That dynamic will be what determines the push and pull between central banks and markets for next year.

This article was written by Justin Low at www.forexlive.com.

European stocks have pared earlier gains with most regional indices now marginally lower. UK stocks remain the exception with the FTSE 100 being up 0.6%, helped out by the softer inflation report earlier today. Meanwhile, S&P 500 futures are down 0.2% as US futures are also looking rather tepid on the session.

You would think that with softer inflation in the UK, risk trades will be ripping higher on a day like this. That especially since the UK is one where most market players were anticipating to have more stubborn inflation. Instead, we’re getting a rather lukewarm response and mixed flows. If anything else, I’d argue that lighter trading conditions are starting to come about now as we move towards the home straight for the year. That should characterise the remainder of the week as well as trading next week too.

This article was written by Justin Low at www.forexlive.com.

10-year UK gilt yields are down 8 bps currently to around 3.572%, leading the fall in global bond yields on the day. 10-year Treasury yields are also seen down a little over 3 bps to 3.892% and contesting the lows for the year currently. It all comes after the softer UK inflation data earlier today here.

It’s been quite a dramatic turn in the bond market since the end of October, and the ongoing rally certainly looks rather unrelenting. I mean, if even the UK economy – which is expected to see more sticky and high inflation – is also showing signs of weakening price pressures, it just validates everything else that we’re seeing elsewhere. And that vindicates the disinflation narrative that markets have been pricing in over the last few weeks.

This article was written by Justin Low at www.forexlive.com.

• The BoE left interest rates unchanged as expected with no dovish language
  as they reaffirmed that they will keep rates high for sufficiently long to
  return to the 2% target.
• Governor Bailey pushed back against rate cuts
  expectations as he said that they cannot say if interest rates have
  peaked.
• The latest employment report missed forecasts with wage growth
  coming in much lower than expected and job losses in November.
• The UK CPI today missed expectations across the board,
  which is another welcome development for the BoE.
• The UK PMIs showed the Manufacturing sector falling
  further into contraction while the Services sector continues to expand.
• The latest UK Retail Sales missed expectations across the
  board by a big margin as consumer spending remains weak.
• The market expects the BoE to start
  cutting rates in Q2 2024

JPY

• The BoJ kept its monetary policy unchanged with interest rates at -0.10% and
  the 10 year JGB yield target at 0% with 1% as a reference cap.
• Governor Ueda repeated once again that they won’t
  hesitate to take easing measures if needed and that they are not foreseeing
  sustainable price increases unless wage growth picks up.
• The latest Japanese CPIshowed that inflationary pressures
  are easing although they remain well above the BoJ’s 2% target.
• The latest Unemployment Rate remained unchanged near cycle lows.
• The Japanese Manufacturing PMI fell further into contraction but
  the Services PMI ticked higher remaining in expansion.
• The latest Japanese wage data beat expectations and as a reminder
  the BoJ is focusing on wage growth to decide whether to tweak its monetary
  policy.
• The market expects the BoJ to hike
  rates in Q2 2024.

GBPJPY Technical Analysis –
Daily Timeframe

On the daily chart, we can see that GBPJPY pulled
back to the resistance zone
around the 184.00 handle where we had also the red 21 moving average for confluence. The
sellers stepped in with a defined risk above the resistance to position for a
drop into the 176.32 level and further added to the bearish bets following
today’s miss in the UK CPI data.

GBPJPY Technical Analysis –
4 hour Timeframe

On the 4 hour chart, we can see that we have an
upward trendline around
the 181.00 handle where the buyers might try to lean onto to fade the latest
drop and position for a rally back into the 184.00 resistance. The sellers, on
the other hand, will want to see the price breaking lower to increase the
bearish bets into the 176.32 level.

GBPJPY Technical Analysis –
1 hour Timeframe

On the 1 hour chart, we can see more
closely the current price action with the pair approaching the trendline. This
is where the battle between the buyers and sellers should get more interesting
as a break to the downside should see the bearish momentum increasing and
leading to a drop into the 176.32 level.

Upcoming Events

This week is a bit empty on the data front as we head
into the Christmas holidays. Today, we have the US Consumer Confidence reports.
Tomorrow, we get the latest US Jobless Claims figures, while on Friday we
conclude the week with the Japanese CPI, the UK Retail Sales and the US PCE data.

This article was written by FL Contributors at www.forexlive.com.

That comes after the softer-than-expected UK CPI data today, with the firm anticipating the BOE to keep with a 25 bps rate cut per meeting starting from May 2024 until the bank rate reaches 3% in May 2025.

This article was written by Justin Low at www.forexlive.com.