WEEK AHEAD: NOV 08

Short Description

EURUSD: Reaction to tapering & inflation...

Video Script

Hi everyone, hope you’re all doing great and ready for another week ahead in markets. The Fed finally announced it will start tapering- so I’m going to talk about how this week will see the ongoing reaction by markets to that big moment. This week we have US and Chinese inflation as well as UK Q3 GDP data on tap- stay right there.

 

So as you may know by now - the Federal Reserve will start tapering QE in November by reducing  bond purchases by $15 billion per month. The Fed have so far prevented a ‘taper tantrum’ by accompanying the announcement with a statement form Fed Chair Powell that interest rate hikes are still a long way away. This led to a drop in the US dollar and record highs for US stock indices as well the second bigger crypto Ether. Gold and silver dropped on the news of less money printing but ended off their lows thanks to the comment on rate hikes.

 

The DAX index all hit a record high last week after ECB president Christine Lagarde said it was quote “very unlikely” that the ECB will hike rate in 2022. That dual message of no rate hikes form the Fed and ECB is bullish for risky assets like stocks. However it clouds the outlook for the EUR/USD currency pair a bit because it’s harder for traders to assess which central bank will tighten policy first when rates stay at zero for a year.

 

For the moment the Fed and the ECB can get away with saying no rate hikes next year because they are predicting the current high level of inflation is temporary. There is also the added risk of slowing job market as demonstrated by some of the recent NFP data. For trading EUR/USD it might come down to deciding whether it’s the Fed or ECB that are more likely to get their inflation forecast wrong- and which one would have to change policy more dramatically if they are wrong. The 1.16 level is still key in EUR/USD, whether it holds, or breaks will gives a clue which central bank the markets think is closest to a policy error.

 

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Ok let’s turn out attention to the economic calendar. It’s a little quieter than last week with no central bank meetings but CPI data is out- and inflation remains a hot topic in markets for the reasons I just talked about. The shifting consensus among economists is that inflation might remains high for a little longer but that its probably already peaked.

 

With the big gains in oil prices in October, I wouldn’t be surprised to see a number north of 5.4 percent, which should in theory be bullish for the US dollar. Less than 5.4% would help support the narrative of temporary inflation. China inflation will also be important - especially PPI which feeds into consumer prices across the world. With the Bank of England suddenly one of the more hawkish central banks and the British Chancellor just announcing a big spending budget, UK Q3 GDP data will be one to watch for the British pound.

 

Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.