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U.S. Dollar and Stocks in Focus Ahead of a Crucial Week

Published 12/12/2022, 04:56 AM
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The week ahead will be an interesting one for investors and probably the busiest of the year so far. The next five days will include global inflation data, economic data, and 11 central bank speeches. However, the currency pairs most likely to experience the highest volatility and news risk are the EUR/USD and the GBP/USD.

Investors will mainly focus on the Federal Reserve, especially during the first 3-days. However, the focus will shift towards the EU and UK on Thursday and Friday. The main events for the US Dollar will be tomorrow’s Consumer Price Index and Wednesday’s rate decision. In addition to the rate decision, market participants will be eager to hear the forward guidance given by the Fed Chairman.

On Friday, the market was shaken by a slightly higher-than-expected Producer Price Index, which is not good for inflation. However, economists still lean towards a 50 basis point hike for this week. Most economists have advised that interest rates are high enough and already in the restrictive territory. This means the Federal Open Market Committee can take a less hawkish stance. Previously the Chairman, Jerome Powells, has advised the regulator would take a “wait and see” attitude while they monitor the lagging effect of their monetary policy.

So how has the market performed since today’s market opened? The US Dollar Index is slightly higher and has increased above 105.00. However, the currency has declined slightly since the opening of the European Trading Session. Global equities had closed lower on Friday after the latest inflation data but remained stable this morning. Commodity markets such as Oil and Gold also continue to remain under pressure.GBP/USD price chart.

The Pound was also affected by the latest Gross Domestic Product, which was slightly higher than expected. The monthly GDP figure increased by 0.5%, which is 0.1% higher than expected by experts. However, the figures continue to support the expectations that the UK economy will remain in a state of stagnation. Tomorrow’s Claimant Counts Change and the BoE’s Speech may also support the Pound.

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The price of the EUR/USD continues to trade within the price range formed after the latest PPI announcement. The asset formed a price rejection candlestick at 1.0501 and a resistance level at 1.0565. This morning the price declined during the Asian session but has been attempting a correction since European traders entered the market.

Technical indicators still signal that the price will remain within the current price range. Market participants may believe that this is the intrinsic value of the exchange rate based on a 50 bps rate hike. However, investors will also monitor potential breakouts, which may trigger stronger price movements. Lastly, traders should note that even though technical indicators are vital to analysis, the price movement this week will possibly be influenced by market news.EUR/USD price chart.

The price has recently been influenced by the latest PPI, which reads higher than expected. The Core PPI increased by 0.4% instead of the expected 0.2%, and the overall PPI increased by 0.3% instead of 0.2%. The announcement can support a more hawkish monetary policy, but only if tomorrow’s Consumer Price Index is significantly higher.

The CPI is expected to read 0.3%. Economists are mainly advising that the reading will need to be at least 0.6% to persuade the Fed. If the CPI reads as expected, investors will turn their attention to the forward guidance, which the chairman will provide on Wednesday. The market will want to learn how high the Fed is likely to go and how long they believe rates will stay high.

On the other hand, the EU might start releasing its data after Wednesday. The ECB will release its rate decision on Thursday and the Eurozone’s Purchasing Manager Index on Friday. This morning the Euro slightly increased in value against the market, including the Pound and the Japanese Yen. However, European Equities such as the DAX have declined.

Next week the price is expected to see little volatility due to religious holidays but may continue to see some price movement based on this week's news.

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