Fed to set agenda for year-end
The greenback was mostly weaker overnight after US inflation was reported in line with expectations as markets turned more cautious ahead of tonight’s US Federal Reserve decision.
The market sees only a 1.0% chance of a rate hike from the Federal Reserve with recent commentary from the US central bank indicating the Fed is now likely finished with rate hikes.
Most recently, Fed chair Jerome Powell said on 1 December: “Having come so far so quickly [on raising interest rates] the Fed is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced.”
The updated projections from the Fed – including the so-called “dot points” that provide interest rate forecasts – will be closely watched. Financial markets are now looking for the Fed to begin cutting rates in May 2024.
The Fed decision is due at 6.00am AEDT.
The weaker USD saw the euro and Japanese yen both gain, with the EUR/USD up 0.3% and the USD/JPY down 0.4%. The British pound was flat.
However, the Australian dollar underperformed, with Reserve Bank of Australia governor Michelle Bullock saying yesterday the RBA is not concerned about falling behind in the inflation fight. The commentary confirms the shift seen at the RBA’s December meeting signaling that the central bank is now less inclined to raise interest rates.
Greenback lower after inflation
The US dollar was also driven lower as the US November inflation report met expectations.
The headline annual inflation number came in at 3.1% with the core number at 4.0% — both in line with expectations.
Looking forward, US producer prices are due Wednesday night. Core producer price inflation probably moderated in November, in line with dropping prices paid indices in regional Fed surveys, excluding volatile energy, food, and trade service costs.
We will keep a careful eye on the PPI elements that are important to core PCE estimates, such as the cost of financial services, health care services, and airfare. Among them, we anticipate a significant recovery in the price index for investment advice and portfolio management as a result of rising stock prices, which should contribute to core PCE inflation.
We are cautiously positive on the US dollar given its recent rebound from oversold levels – the RSI momentum indicators were heavily stretched in late November. Of course, tonight’s Fed statement will likely drive USD sentiment into the year-end.
KRW boosted by better exports
Globally, manufacturing might be nearing a bottom. In South Korea, the seasonally adjusted unemployment rate is predicted to increase slightly from 2.5% in October to 2.6% in November. The little increase in the unemployment rate is indicative of the tight labor market conditions that persist. We anticipate that the service sector, which probably generated about 380K jobs in November, will continue to create good positions and offset job losses in the manufacturing sector.
Due to strong seasonal demand brought on by the winter flu, we anticipate robust employment growth in the service sector in the public health and social care subsectors. This should more than balance job losses in other subsectors like real estate. Overall, we anticipate that the labor market will continue to be strong despite the increase in the unemployment rate, with employment growth maintaining at about 1% year over year.
Because (a) electronic exports are still recovering, which should guarantee that export recovery is on a solid foundation, and (b) income repatriation is rising as a result of recent tax measures, we are optimistic on KRW vs. USD. This could drive further USD/KRW declines.
USD mostly lower ahead of Fed
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 11 – 15 December
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
