FOMC Prepares to Steal the Trading Floor
Inflation kept rising at abnormal levels in the US as consumer prices increased another 0.6% month-on-month, the November CPI figures showed last Friday.
While this adds pressure on the Fed to hike sooner than expected, the 39-year record figure was in line with economists’ expectations at 6.8 percent.
With core inflation also rising to 4.9 percent in November, the Fed is very likely to change the language on Wednesday’s policy meeting, and particularly about the timing of tapering as inflation is undoubtedly not “transitory” also when excluding energy and food.
The Wallstreet had anticipated that the CPI data would show a figure above 7% or more in last month’s inflation. The lighter number allowed investors to push the SPX500 to nearly all-time highs on Friday, closing at 4728.5.
However, as the deadline for the FOMC looms, the event is more likely to trigger a sell-off event in the stocks markets than not as concerns about growing inflation rise. As a result, the index could slide towards 4600 after printing an all-time high on Monday or Tuesday ahead of the widely anticipated meeting. Resistance lies at 4800.
ECB Unlikely to Provide Boost on Euro
Policymakers also meet in Europe and the UK.
Although the Europeans are less concerned about ECB as they have been accustomed to low rates for a while, inflation rose to a 25-year high at 4.9 percent in November.
While most expect the ECB to follow through with a raise after they stop QE, and certainly not soon, it is very likely that the bank will commit to buying bonds well into 2022 despite inflation overshooting expectations.
Markets seem more concerned about new variants finding home in the EU rather than inflation as the new Omicron variant, also known as B.1.1529, has many mutations, most of which target the cells the vaccines do.
With concerns of high transmissibility and virulence rise, the ECB might even have to ramp up its PEPP, which according to the current state of terms, is expected to end in March 2022.
If the ECB hints at an extension of the PEMM or APP programs in its Dec 16 meeting, the euro might come under severe pressure as the horizon for a hike will be pushed back. A dovish ECB can trigger new selling shorts, driving EURUSD below $1.12. Should the ECB be a non-event, as many analysts expect, the pair might consolidate, finding support for a tilt towards $1.14 should the greenback allows.
Markets Expect Early Signals ahead of BoE
On the other hand, known to traders for getting cold feet recently, the BoE seems to be on a similar path to the last meeting once again as concerns around Omicron increase.
In November, most participants expected the BoE to signal a hike in early 2022 as inflation expectations soar but instead, they rose the prospect for holding rates steady for longer.
As the UK government keeps imposing new restrictions, MPC members meet again this week to discuss monetary policy. With the travel industry widely affected by vaccine regulation, recent recovery stalling might add more dovishness than hawkishness to BoE’s response, driving the pound towards $1.30. If the members hint at an unlikely surprise amidst the limited impact of Omicron on economic data, GBPUSD could find intermediate resistance near $1.33.
Some analysts expect the UK’s jobs numbers and inflation rate on Tuesday and Wednesday, respectively, to provide early signs pre-MPC. In such a scenario, a boost in all items could see the British pound soar towards $1.34.
Omicron Remains a Downside Risk for Oil
As markets’ appetite around Omicron improves while significant downside risks have been already priced for oil, WTI is set to continue its ascend. The sharp decline owed to travel bans and inflation rising in the US did their fair bit over the recent week, sending oil down to August prices, but last week’s reversal to $73 indicates oil prices are due to further recovery towards $76.
The latest reports from the medical space add to the upside as they suggest that health risks from Omicron can be easily fought with booster vaccines. Since the drop was mainly owed to Omicron and partially on the expected output boost from OPEC+, both downside risks are discounted now, and the commodity looks bid.
In the medium term, a threat for oil is prices rising too high, which Biden has been vocal about. While his SPR plan has yet to see the light of accommodation, more evidence on the timeline could prove detrimental for oil, but not to an effect where the $70 support breaks. Such decline would require further travel bans or a mass discrepancy on Thursday EIA’s stock report.
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