Fed Decision, US Inflation and Alabama Election to Guide Dollar

US benchmark rate expected to be 25 points higher

The USD was mixed against major pairs on Tuesday ahead of the release of the final results of the Alabama special election, inflation data in the US and the awaited December Federal Open Market Committee (FOMC) meeting.

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 it’s 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 but there is a 12.4 percent probability of a 50 basis points hike. Economists are forecasting 3 rate hikes in 2018 and the dot-plots could align with those estimates if the central bank intends to speed up the current rate lift cycle. Fed Chair Janet Yellen will make her final appliance as Chair when she hosts the FOMC press conference at 2:30 pm EST.

The EUR/USD lost 0.23 percent on Tuesday. The single currency is trading at 1.1742 ahead of the end of the two-day Federal Open Market Committee (FOMC) meeting. The much awaited December rate hike is expected to be announced. If the Fed hikes rates it would have done so for the third time this year leaving the benchmark Fed funds rate in a 125 to 150 basis points range.

The meeting will mark an end of an era. Although it will be until February when Fed Chair Janet Yellen steps down, this will be her last appearance at the height of her powers. Jerome Powell will take over the US central bank and the market is starting to price in 3 rate hikes in 2018. The economy has not shown signs of overheating, which will be an argument used by the doves within the FOMC to reduce the path of hikes as inflation remains weak.

The dollar has risen ahead of the Fed meeting as producer prices have risen more than expected. Strong inflation would make Powell’s job easier within the Fed. The higher price signal combined with a weaker than expected German ZEW economic sentiment. German investors have dialled back their optimism somewhat as the European Central Bank (ECB) remains dovish despite strong economic fundamentals in Europe. The ECB will also play a big part this week with the release of their rate statement at 7:45 am EST on Thursday, December 14. 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.

Market events to watch this week:

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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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza