Markets Talking Point: Recession Looms On UK Economy As The Pounds Remains Strong/ The Euro Falls As The US Dollar Strengthens on PPI and Ahead of Critical CPI Data/Market Volatility Comes Back To Life

• UK’s GDP Report: Fears of a recession continues
• Euro support faded after the US Dollar continued its rise.
• This week, the Fed, ECB, and BoE will make rate decisions.
• Inflation numbers might be crucial. Will it help the EUR/USD?
• Get market update reports

GBP/USD 

The British pound remained modest in its reaction to the UK GDP beat this morning, but this might change once the European session begins. Nonetheless, the UK GDP numbers surpassed nearly all indicators and managed to surpass the pre-COVID level of February 2020.

The services sector was the biggest contributor to GDP in October, and following a disastrous month in September, the help was greatly appreciated. Given that the UK is mostly a service sector, the publication provides some optimism to the larger UK economy.

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UK’s GDP Report

Contributors to UK’s GDP During A 12-month Period:

Chart from the Office For National Statistics

According to the ONS research, “electricity, gas, steam, and air conditioning supply constituted the most negative factor,” emphasising the UK and Europe’s deteriorating energy woes. 

Should Russia seek to further reduce supplies of gas and oil following the G7 and their decision to impose a ceiling on Russian oil, the situation might exacerbate and have a negative influence on future GDP figures and, as a result, the pound.

Moving forward, the weak GBP reaction might be due to fears of strike action in the UK’s private and public sectors, which PM Rishi Sunak’s administration is looking to replace with military troops.

GBP-USD Chart

Cable appears to be testing ascending wedge support, with a daily candle closure bringing the 1.2154 swing low and 200-day SMA into view. This week’s vital economic data will likely be the spark for a negative or upward break, depending on the results.

Currencies Talking Points

The Euro is falling today as the US Dollar strengthens ahead of a critical week of central bank meetings and data. The list is led by the Federal Reserve, the European Central Bank (ECB), and the Bank of England (BoE). The market expects all three banks to raise rates by 50 basis points (bps).

Risk assets in general were under pressure on Monday, despite further indications from China that they may be abandoning its extremely restrictive Covid-19 policy. According to a leading health authority, the omicron form has a similar fatality rate as the flu.

The Asian session has seen a sea of red in APAC stocks, with the growth-linked Australian Dollar being the worst-performing currency.

On Friday, US PPI was hotter than expected, rising 7.4% year on year through the end of November. The US CPI on Tuesday is now in the spotlight.

Despite reports that a major North American pipeline remains closed, crude oil prices have remained stable thus far. The Keystone Pipeline connects Canadian oil resources to the Gulf Coast of the United States.

At the time of writing, the WTI futures contract is at US$ 71.60 bbl, while the Brent contract is slightly higher at US$ 76.50 barrel. Gold has fallen below $1,800, while longer-term Treasury rates have fallen a couple of basis points.

In other news, US authorities have requested Japan to limit semiconductor shipments to China, following up on a request made to the Netherlands last week. The trade balance, industrial and manufacturing production statistics are the highlights of a busy day for UK data.

EUR/USD 

Since hitting a twenty-year low of 0.9536 in October, the EUR/USD has been on the rise. It reached a high of 1.0595 but was unable to break beyond a breakpoint and prior peak at 1.0615 and 1.0638, respectively. These levels might continue to provide resistance.

The 260-day simple moving average (SMA), which is now at 1.0569, was also in that area and might give resistance. On the downside, past lows and breakpoints of 1.0443, 1.0290, 1.0223, and 1.0198 may provide support.

Markets Ahead

Last week, market volatility returned, with the VIX ‘fear indicator’ rising over 20%, the highest since August. The Dow Jones, S&P 500, and Nasdaq 100 all fell 2.08%, 2.71%, and 2.72%, respectively, on Wall Street. Things were not looking good in Europe, too, with the DAX 40 down 1.5%. The ASX 200 in Australia lost 2.14%.

Much of the volatility happened at the end of last week, when higher-than-expected November US wholesale inflation data hit the wires. It didn’t hurt that consumer sentiment at the University of Michigan surprised higher as well. Treasury rates rose throughout the maturity spectrum, indicating the Federal Reserve’s aggressive monetary policy forecasts.

The Fed Rate Predictions

All eyes are on the Federal Reserve this week. Policymakers have emphasized that a slower rate of tightening is expected. Markets anticipate a 50-basis-point rate increase to 4.5%. However, policymakers are gradually opening the door to tightening over a longer period of time. Markets are still anticipating a shift, which might lead to disappointment.

Key Inflation Data (CPI)

The day before the Fed, we will also receive the most recent CPI report. In the United States, headline inflation is expected to fall to 7.3% year on year in November, from 7.7% before. An unexpectedly strong result may easily send the market crashing, supporting the US Dollar while harming gold. 

Other important occurrences include the Eurozone Central Bank’s and Bank of England’s rate decisions for the Euro and British Pound, respectively. 

What else is in store for markets this week?

Company Earnings Reports

Here are top companies expected to release their earnings reports this week;

• Oracle Corporation    
• Coupa Software Incorporated
• BHP Group Limited
• Centrais Electricas Brasileiras S.A.- Eletrobras    
• Banco Santander Brasil SA
• Adobe Inc.    
• Jabil Inc.
• Accenture plc    
• Darden Restaurants, Inc.

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