All eyes on the Fed: USD holds firm, GBP boosted by inflation
10:15, 15 December 2021
Forex markets were quiet in European morning trading, as investors awaited a key Fed meeting which might order an acceleration in the tapering of the bond purchase programme.
The British pound (GBP) outperformed its G5 peers this morning, boosted by a higher-than-expected consumer prices index in the UK. Inflation climbed to 5.1% in November, the highest level since September 2011, increasing pressure on the Bank of England’s interest rate decision due tomorrow.
The DXY index, which tracks the US dollar against a basket of six major currencies, is slightly down (-0.1%) at 96.43, following a rebound session yesterday that ended at 96.51.
- EUR/USD edged up to 1.1270 (+0.12%) by 10:30 GMT
- USD/JPY was broadly unchanged at 113.76 (+0.04%)
- USD/CHF was flat at 0.9244 (+0.05%)
- GBP/USD rose to 1.3258 (+0.12%)
Among risk-sensitive currencies, the Australian dollar (AUD) recovered from yesterday’s losses, supported by higher coal prices, while the oil-related Norwegian krone (NOK) weakened strongly yesterday on the back of lower Brent prices and tighter Covid restrictions in the country.
- AUD/USD recovered to 0.7129 (+0.38%)
- NZD/USD was unchanged at 0.6746 (+0.01%)
- USD/CAD was flat at 1.2868 (+0.05%)
- USD/NOK edged slightly down to 9.0964 (-0.09%)
Emerging market currencies continued to lose ground as traders hedged their risks ahead of the Federal Reserve meeting. The South African rand (ZAR) is down 0.6% after losing 0.4% yesterday, while the Turkish lira (TRY) slipped almost 2% after plunging more than 4% yesterday.
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Forex daily matrix – 15 December 2021
Forex daily matrix as of 15 December 2021, 10.30 a.m. GMTUS dollar
At the time of writing, the US Dollar Index (DXY) was at 96.43, down 0.1% on the day.
The main event of today is the Federal Reserve meeting. The market expects the Fed to announce an acceleration in the pace of tapering of quantitative easing – the process by which central banks inject money into their economies by buying back government bonds.
The Fed is now expected to tape at a level higher than $15bn monthly and to end the process by early next spring, due to persistently elevated inflation and a tight labour market.
Additionally, the Fed will revise its forecasts for rate hikes and inflation, and may change the language used to describe inflation by excluding the term ‘transitory’.
Yesterday, the US producer pricing index (PPI) increased 0.8% from a month earlier in November 2021, the most since July and higher than market projections of 0.5%, highlighting worries about how growing input costs pass through consumer prices.
US money markets currently assign a 58% probability to a rate hike as soon as May 2022, and a 60% chance of at least three cumulative hikes by the end of 2022, according to CME’s latest FedWatch Tool.
US dollar (DXY) technical levels:
- 52-week high: 96.82
- 52-week low: 89.22
- 50-day moving average (one-day chart): 95
- 200-day moving average (one-day chart): 92.71
- 14-day Relative Strength Index (RSI) (one-day chart): 60
Chart of the day: UK inflation hits 2011 highs
UK CPI year on year percentage change – Credit: TradingviewBritish pound
By 10:30 GMT today, the cable (GBP/USD) was trading at 1.3258, up 0.2% on the day, while EUR/GBP traded flat at 0.8500.
This morning, the UK Consumer Price Index (CPI) grew 5.1% in the year to November 2021, the highest level since September 2011, up from 4.2% in October and above market forecasts of 4.7%. Yesterday, UK labour market statistics showed a solid performance, with the unemployment rate dropping to 4.2%, the lowest since June 2020.
Inflationary pressures and tightening labour market conditions may now exert further pressure on tomorrow’s Bank of England interest rate decision.
Markets do not anticipate the BoE to move toward a raise, since the spread of Omicron variants may muddle the economic picture in the short term, although the divide between doves and hawks within the board may conceivably shrink.
On the political front, the opposition Labour Party aided the UK government in the House of Commons yesterday in approving new restrictions requiring facial coverings and so-called Covid passports in some settings. A total of 96 Conservative MPs voted against the measures, seen by some as an infringement of civil liberties, in the largest revolt in Prime Minister Boris Johnson’s tenure.
GBP/USD technical levels:
- 52-week high: 1.4248
- 52-week low: 1.3133
- 50-day moving average (one-day chart): 1.3492
- 200-day moving average (one-day chart): 1.3771
- 14-day Relative Strength Index (RSI) (one-day chart): 41
Euro
EUR/USD was last at 1.1270, up 0.2% on the day.
November inflation figures from France, Spain, and Italy indicated an increase from the previous month to 2.8% (y/y), 5.5% (y/y), and 3.7% (y/y), respectively, but remained broadly in line with predictions.
On the front of the Covid-19 restrictions, Italy declared yesterday that all arrivals from EU nations, including those who are previously vaccinated, will be subject to obligatory negative testing, sparking outrage in Brussels.
The market does not anticipate any significant change away from a dovish stance at tomorrow’s ECB meeting. According to today’s rumours reported by Bloomberg, the ECB’s revised predictions will indicate that inflation will remain below 2% in 2023 and 2024.
EUR/USD technical levels:
- 52-week high: 1.2349
- 52-week low: 1.1184
- 50-day moving average (one-day chart): 1.1446
- 200-day moving average (one-day chart): 1.1787
- 14-day Relative Strength Index (RSI) (one-day chart): 41
Forex performance heatmap – 15 December 2021
Forex performance heat map as of 15 December 2021, 10.30am GMT – Credit: RefinitivOther currency pairs (% change from previous close):
- USD/MXN -0.02%
- USD/ZAR +0.58%
- USD/TRY +1.91%
- USD/RUB +0.11%
- USD/KRW +0.20%
- USD/CNH -0.01%
- EUR/NOK +0.03%
- EUR/SEK -0.05%
- EUR/PLN -0.12%
- EUR/HUF +0.44%
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