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Market Report : 01.12.22

Published: 01/12/2022 By ECAP

Sterling has started December on the offensive amidst a sharp improvement in global investor sentiment following yesterday’s speech of Federal Reserve Chairman Jerome Powell. Powell effectively validated market expectations for a 50-basis point rate hike later in the month, confirming the Fed was approaching the tail end of its rate hiking cycle. Nonetheless, long-term economic challenges for the UK remain significant, however, the relatively weak Pound may be able to retain some decent underlying bull momentum, and ride a little higher on a softening of USD in the near-term.

The Euro retraced all of yesterday’s losses following dovish comments from Fed chair Jerome Powell and was last seen not far from the five-month high touched at the start of this week. However, the Euro's gains have been tempered by a 2.8% slump in German retail sales in October, setting an ominous tone for a fourth quarter in which Europe's largest economy is widely expected to contract. On the other hand, Eurozone consumer prices came in lower than expected on Wednesday, potentially pointing to an inflation peak having been reached in the region, triggering a down-tone on rate hike bets for the European Central Bank.

The U.S. dollar slumped in early European trade this morning after Federal Reserve chair Jerome Powell pointed to smaller rate hikes ahead, boosting risk appetite to the detriment of this safe haven. The Dollar Index fell 0.2% to 105.70, extending yesterday’s more than 1% drop, and closing the month of November over 5% lower, its worst monthly showing since September 2010. “The time for moderating the pace of rate increases may come as soon as the December meeting.” During his press conference, Powell has acknowledged that the components that caused inflation to surge are now trending lower. However, Powell also mentioned that the terminal rate might be higher than the September forecasts. The Dollar is likely to remain under pressure as long as this theme remains alive, and it would appear a “nasty surprise” is required from Friday's U.S. labour market data to shift the dial. For the time being, the only thing that seems relevant to financial markets is that Fed monetary policy is "normalising."