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Market Report : 12.12.22

Published: 12/12/2022 By ECAP

Sterling managed yet another weekly gain last week against both the euro and dollar, in a week almost completely lacking in major news, confirming that for now the path of least resistance for the pound is higher. The pound was buoyed further this morning by strong GDP data for October, which showed a surprise expansion (+0.5%). The Bank of England meeting is now in sight and we, like everyone else, expect the MPC to raise the bank rate by another 50bps. The key will be the expected split within the MPC. Analysts think that an unprecedented four-way split is not out of the question either, with Silvana Tenreyro indicating recently that she could vote in favour of no change. The publication of key labour market and inflation data in the days leading up to the meeting do, however, make forecasting this week’s meeting an unusually difficult one.

After an unusually quiet week in the Eurozone, all eyes turn to the December meeting of the ECB on Thursday. Markets expect the central bank to raise rates by 50bps, in line with consensus. We do, however, think that the gap between minimal market expectations for future hikes and economic reality is large, and we expect the communications from the ECB to push in a hawkish direction.

The unusual contrast between the November CPI release tomorrow and the Fed meeting on Wednesday, will make for very volatile trading this week. The market is expecting a relatively mild outcome in the monthly number of less than 4% annualised inflation for both the headline and the core measures. An upside surprise here may be more upsetting than a downward one, as it would make it more difficult for the Fed to pivot towards a wait-and-see policy the next day. As for the Fed meeting, perhaps the key outcome will be the terminal rate that FOMC members expect to see in 2023, represented by the bank’s famous ‘dot plot’. Anything north of 5% could upend the positive narrative of the last few weeks, and provide some headwinds for the US dollar.