Dollar Higher Ahead of Fed December Rate Hike

Central bank decisions to dominate busy week

The US dollar appreciated during the week as the tax reform inched closer to reality. Fundamental data in the US was positive for the currency but hourly wages again disappointed by coming below expectations. Given the importance of inflation indicators inside the Fed stagnant wages could make it hard on the US central bank to keep raising rates in 2018.

The economic calendar is packed on the week of December 11 to 15. Inflation data in the US will be published by the Bureau of Labor Statistics on Wednesday, December 13 at 8:30 am. Core CPI is expected to gain 0.2 percent but prices taking into consideration food and energy are forecasted to increase by 0.4 percent.

The U.S. Federal Reserve will release its quarterly economic projections and Federal Open Market Committee (FOMC) statement on Wednesday, December 13 at 2:00 pm EST. The highly anticipated December meeting of the Fed is expected to bring a 25 basis points rate hike. The market has already priced in that move as it was heavily telegraphed by policy makers. Economists are forecasting 3 rate hikes in 2018 and the dot-plots could align with those estimates. Fed Chair Janet Yellen will make her final appliance as Chair when she hosts the FOMC press conference at 2:30 pm EST.

The Bank of England (BoE) will release its monetary policy summary on Thursday, December 14 at 7:00 am EST. There is no change expected to the UK benchmark rate which stands at 0.50 percent. The European Central Bank (ECB) will follow close by with their release of their rate statement at 7:45 am EST. ECB President Mario Draghi will host a press conference at 8:30 am EST. The ECB is not expected to change its QE program or interest rates at this time, but the market will be on the lookout for its 2020 growth and inflation forecasts.

The EUR/USD lost 1.12 percent in the last five days. The single currency is trading at 1.1762 depreciating against a rising USD. The dollar has gained on the back of tax reform optimism. The lack of pro-growth policies this year saw the dollar freefall as the promised tax reform and infrastructure spending have not materialized. The two bills passed by Senate and Congress could make tax reform a reality and have given the greenback a shot in the arm. Politics remain a big driver of the market. This week President Trump signed a short term funding bill pushing back the larger debt ceiling debate to December 22.

Central banks will be front and center in the coming days, with the U.S. Federal Reserve and the European Central Bank (ECB) a day apart. The anticipated December rate hike in the US will widen the gap between benchmark rates as the Mario Draghi is not expected to tighten monetary policy yet, despite strong economic data out of Europe.

The USD/CAD gained 1.45 percent during the week. The currency pair is trading at 1.2868 after the Bank of Canada (BoC) kept rates unchanged at 1.00 percent and softer oil prices. The central bank did mention a strong job growth and rising inflation signalling that the next move could be a rate hike, but the timing of the monetary policy decision is up in the air. The fate of the NAFTA negotiations is still uncertain and with such a large portion fo the economy tied to the outcome it would be premature for the BoC to speculate on something so outside its control, but very much a factor on its mandate.

The USD kept getting support from tax cut optimism and a strong jobs report ahead of the Federal Open Market Committee (FOMC) on December 13. The BoC is on wait-and-see mode as there are a lot of unknowns that could have a significant impact on the Canadian economy. The market is not pricing in a rise in interest rates until the second quarter. The Fed by comparison is expected to hike 3 times in 2018, with the first lift coming in March as Jerome Powell begins to make his mark on the central bank.

The Canadian economic calendar will be thin as the year winds to an end. Housing data on new dwelling prices will be release on Thursday, December 14 at 8:30 am EST. BOC Governor Stephen Poloz will give a talk titled: “Three Things Keeping Me Awake at Night” in Toronto at 12:25 pm EST.

The GBP/USD lost 0.57 percent in the last five days. The currency pair is trading at 1.3395 after Brexit negotiations were unlocked with an agreement on the Irish border. The optimism was short lived as the pound is once again on the back foot given the uncertainty of trade negotiations. The divorce between the UK and the EU is seen as amicable, but real talks could be delayed as the EU is asking for a vision of the future of UK conservatives given the fracture within the party. The EU is hoping to get a less contradictory stand from Britain regarding leaving the Union.

The EU’s chief negotiator has been clear that despite the UK concessions the divorce is for real and a trade agreement will be based more on the one currently in place with Canada, that the one enjoyed by the UK but invalid after two years when Brexit becomes final.

The Bank of England (BoE) has shifted monetary policy to deal with the side effects of the Brexit referendum and political instability. High inflation has forced the central bank to hike interest rates, but as more details emerge on Brexit a rate cut is not out of the question. Inflation data will be released on Tuesday, December 12 at 4:30 am EST. The forecast calls for a flat reading at 3.00 percent inflation. Surveys on inflation continue to point to higher prices and a faster pace of UK interest rate rises. BoE Governor Mark Carney has said that gradual increases were likely in the next couple of years.

Market events to watch this week:

Tuesday, December 12
4:30 am GBP CPI y/y
8:30 am USD PPI m/m
Wednesday, December 13
4:30 am GBP Average Earnings Index 3m/y
8:30 am USD CPI m/m
8:30 am USD Core CPI m/m
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
7:30 pm AUD Employment Change
7:30 pm AUD Unemployment Rate
9:00 pm CNY Industrial Production y/y
Thursday, December 14
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
4:00 am CHF SNB Press Conference
4:30 am GBP Retail Sales m/m
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Core Retail Sales m/m
8:30 am USD Retail Sales m/m
8:30 am USD Unemployment Claims

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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