December 10, 2021 10:35:11
Today sees the key release of the week, and possibly month, in the form of the US inflation data. This seems to be the new NFP release as policymakers’ focus shifts to how long elevated price pressures will last.
Consensus expects a +0.7% rise m/m in November which lifts the annual rate to 6.8% y/y. This overtakes the 6.2% increase in October which was the fastest gain in 31 years. The core measure is seen rising +0.5% m/m, with the annual rate pushing up to 4.9% from the October print at 4.6%.
Analysts are alert to an upside surprise with the range of forecasts topping 7%, which is unheard of since 1984. Indeed, the Biden administration signalled overnight that the readings could be high. Though they stressed that the data will not reflect the recent lower energy costs.
The Fed has already made very clear that it will step up policy tightening next week. Bumper data may hasten a faster pace in tapering. The Fed’s rate hike path could be speeded up too, with currently two rate hikes fully priced by the end of 2022. We note that markets are looking through the Omicron variant, and supply chain disruptions are showing signs of easing. That will change and exacerbate price pressures ahead, if Omicron concerns spread and more restrictions follow.
EUR/USD struggling to move higher
Seasonal trends tend to see dollar weakness through December. But the Fed is seen moving relatively quickly to policy normalisation in the new year, while the ECB is still working through its bond buying, with more policy details at next week’s meeting.
Given the slide in EUR/USD has tracked the rise in Fed action, more downside should be expected, with the dollar at least supported into the FOMC meeting. After trading at a one-week high at 1.1354, EUR has moved back below 1.13. A long-term Fib level of the 2020/2021 move sits at 1.1290. The mid-figure zone with the 21-day moving average, looks to be an area of discomfort for the single currency at present. Losses may find support at 1.1227, before a retest of 1.12.
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