A relatively dovish speech from Fed chair Powell, and the prospect of a pivot away from zero-COVID in China, put some fuel into the risk asset rally last week. The US dollar was once again one of the worst performing currencies in the world, having suffered its worst monthly performance since September 2010 in November, falling against all but one of its G10 peers. The greenback has now retraced 6% from its late-September highs in trade-weighted terms. Traders are now short the dollar on net, and we could see some consolidation of current levels into year-end, but it will all depend on the relative hawkishness of the respective central banks at their upcoming December meetings. This week will be a quiet one in terms of data releases and policy news, and markets will likely mark time as they wait for the big three central bank meetings that will take place in the span of less than 24 hours next week. The Federal Reserve will kick things off on 14th, followed by the Bank of England and the ECB on 15th.

 

GBP

Sterling continued its strong rebound from the depths of the fiscal crisis, as markets become more confident that sane fiscal policies will be followed, and the backdrop becomes more friendly to risk taking in general. Macroeconomic data releases also continue to come in slightly better-than-expected, notably the recent PMI prints, further raising hopes that the downturn in UK activity may not be as severe or prolonged as some of the worst-case scenarios. Talk of a Swiss-style model for relations with the EU also soothed nerves last week, and some hawkish comments from MPC members probably mean that sterling will have an easier time going up than down. That is, at least until the Bank of England clarifies (or further muddies!) its position at the December meeting in 10 days hence. A 50-basis point rate hike is widely expected by investors, so attention will likely be largely on the bank’s rhetoric on the pace and extent of additional tightening in 2023.

 

EUR

The drought of market moving news out of the Eurozone last week and this one means that the common currency is mostly moving in reaction to news elsewhere, notably the US and China. Both were positive last week, with Powell telegraphing a rate hike of only 50bps in December and Chinese authorities signalling that lockdown measures will be relaxed. Hopes that the zero-COVID policies may soon be a thing of the past has helped risk assets in general in the past week and allowed the euro to bounce around the top where it has been trading for the past few weeks. Q3 GDP data will be released on Thursday, though this is merely the revised print, so volatility in the euro may be rather low around its release. Expect ECB member speeches to garner far more attention leading into next week’s highly important European Central Bank meeting.

 

USD

Markets were desperate for a sign that the Fed is ready to pivot away from massive 75bp hikes, and it got its wish last week. A 50bp rate increase in December is now priced in, and while in previous hiking cycles this would have been considered a jumbo move, this passes for good news on the rate front nowadays.

News out last week was positive for the economy and mixed for inflation. Actual activity numbers are so far strong in the US, and labour markets remain taut. While the PCE inflation report confirmed the good news from the earlier CPI one, wages in October rose considerably more than expected and seem to be trying to catch up with inflation, raising the prospect of second-round inflationary effects. For now, all is forgotten in celebration that 75bp are done with. Bonds rallied in tandem with risk prices and the dollar continued to retrace its 2022 gains.