The Week Ahead 18th – 22nd December: The FED U-Turn

Welcome to Key To Markets preview of the Week Ahead.

Currency Pair Performance

5-day performance as of December 14, 2023. 10:00 GMT

Source: finviz.com

10 Big Stories Last Week

In case you missed it…

Fed indicates 3 rate cuts next year. This was more dovish than initially expected, sending the Dow Jones to a record high.

COP28 approved a deal to move away from fossil fuels. Government ministers from almost 200 countries approved a deal to shift away from fossil fuels.

China entered deflation. The world’s largest economy posted CPI of -0.5% YoY, raising concerns over the fragility of the economic recovery.

Oil fell to a 5.5-month low. The commodity dropped to $68 per barrel on oversupply fears and concerns over the demand outlook. The IEA expects the oil demand slowdown to persist in 2024.

Tesla recalled 2.5 million cars. The EV maker recalled cars in the US after the regulator found its driver assistance system, Autopilot, to be partly defective.

The court ruled against Alphabet vs Epic Games. The Google parent company was found to be guilty of monopoly activity against the Fortnite maker.

ECB left interest rates at 4%. The central bank left rates at a record high and pushed back on rate cut bets.

Apple hit a record high. Apple rose to $198, a record high amid a broad-based tech rally following the FOMC interest rate decision.

BoE left rates unchanged. The central bank, as expected, left rates at 5.25% and pushed back against rate-cut bets, saying it was too early to discuss rate cuts.

DAX rose to a record high. The German stock index rose to 17000, an all-time high, boosted by Fed and ECB dovish pivot bets.

Chart of the Week

The Federal Reserve surprised the market, projecting three rate cuts across 2024, up from two previously forecast. The long-awaited Fed dovish pivot appears to have arrived. Meanwhile, the US economy is also on track for a soft landing as inflation cools, growth shows some signs of slowing but nothing alarming, and the jobs market remains resilient.

With the Fed providing clarity over its position, the outlook for stocks appears to be brightening further. However, this is not necessarily the case.

The chart shows that the majority of declines in these bear markets occurred after the Fed’s dovish pivot. Will 2024 be different?

5 Things to Watch This Week

1. BoJ rate decision
The BoJ will announce its rate decision on Tuesday, December 19th, and is expected to leave its negative interest rate unchanged. The meeting comes after speculation that the BoJ could adopt a hawkish pivot sent the yen soaring to a 4-month high. However, the hawkish bets were pared back after comments from BoJ Governor Ueda, who said he was in no rush to unwind ultra lease monetary policy.

2. UK CPI
UK inflation is due to be released on Wednesday, December 20th. In October CPI cooled to 4.6% YoY from 6.7% in September as energy prices fell. The market will be keen to see whether the trend is continuing, particularly after the BoE warned that the final stretch to get inflation back to 2% could be challenging. The BoE forecasts inflation remaining above 2% in 2024. Hotter-than-expected inflation would support the BoE’s view that rates must stay high for longer and could boost the pound versus the EUR and the USD, where inflation is cooling.

3. US Core PCE
Core PCE, the Fed’s preferred inflation gauge is due to be released on Friday, December 22nd. Inflation in the US has been steadily cooling, and the market will be watching closely to see if this trend continues. The data comes after the Federal Reserve adopted a more dovish tone at the FOMC meeting last week, projecting three interest rate cuts in 2024, up from the two previously expected. Cooler-than-expected inflation could fuel bets that the Fed will cut rates even more aggressively next year.

4. Micron Technologies earnings
Micron Technology will release fiscal Q1 earnings on Wednesday, December 20th. Wall Street is expecting a loss per share of $1.02, marking a year-over-year decline, on higher revenue of $4.62 billion. The focus will be on guidance Micron technology is expected to have a brighter outlook for in 2024 thanks to the recovering memory chip market. The share price trades at its highest level since February 2022, ahead of the results.

5. Lower volumes and less liquidity
Heading towards the start of the holiday season, trading volumes can start to decrease, leading to less liquidity. Lower volumes and liquidity can sometimes lead to spikes in volatility and larger price swings – good or bad news can have a magnified effect on the price action.

Economic Calendar Highlights

Source: FXStreet.com

Technical Analysis:

TA of the major asset classes (Forex – Commodities – Indices…).

EUR/USD (D1)

The EUR/USD trend is bullish, as it is trading above the 50-day SMA. The fractal pattern has not recently shown higher highs, which indicates a correction within the uptrend. The current support and resistance levels are at 1.0880 and 1.1000, respectively. The RSI is above 50 but below 65, suggesting bullish momentum without being overbought.

GBP/USD (D1)

GBP/USD is exhibiting a strong uptrend, remaining above the 50-day SMA and continuously setting higher highs and higher lows as marked by the fractals. Support and resistance are around 1.2685 and 1.2830, respectively. The RSI is overbought above 65, supporting the ongoing bullish momentum.

USD/JPY (D1)

USD/JPY is in a downtrend, trading well below the 50-day SMA. Fractals show a series of lower highs and lower lows. The pair is slightly above the support at 141.00 with resistance near 143.4 then 145.5. The RSI is oversold below 35, indicating bearish momentum but also nearing a potential area for a correction or trend reversal.

XAU/USD (Gold vs. US Dollar) (D1)

Gold is in the correction of an uptrend, indicated by its position above the 50-day SMA while the fractals show lower lows. The key support and resistance levels are at about 1962 and 2078, respectively. The RSI is above 50, indicating continued bullish sentiment, but well down from recent overbought territory.

Brent Crude Oil Futures (D1)

Brent Crude is under the 50-day SMA, with a bearish trend indicated by the fractals forming lower highs and lower lows. The support level is around 72.33, while the resistance is at 80.10. The RSI is below 50 but not in the oversold region, reflecting less bearish conditions.

S&P 500 Index (D1)

The S&P 500’s trend is strongly bullish, above the 50-day SMA, and the fractals confirm a strong trend with higher highs and higher lows. The index is currently testing the resistance at approximately 4728, with the support level far below at around 4648. The RSI is above 80, which is in very overbought territory, suggesting caution for the continuation of the current trend without a deeper correction.

Thank you very much for reading – and have a great week trading!

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