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Fed hikes again as attention turns to BOE and ECB

In Janet Yellen's last meeting as head of the Federal Reserve board, the US central bank raised rates for the third time this year and fourth time in 12 months, as she brings down the curtain on what is expected to be a successful legacy of not only kick-starting the rate-hiking cycle, but also starting the ball rolling on the balance sheet reduction programme.

She may have only served one term as Fed chair but she has certainly made her mark, and her replacement Jerome Powell will have some formidable shoes to fill.

Meanwhile, markets in Asia don’t appear to have been affected too much by the latest Chinese retail sales and industrial production data for November. Industrial production came in at 6.1%, but it was the retail sales numbers which were of particular interest, especially given the record sales that were reported on singles day. The October numbers came in at 10%, so it wouldn’t be unreasonable to expect to see a significant pickup in the November numbers. Ultimately, November retail sales showed a rise of 10.2%.

In another busy day for central banks it’s the turn of the Swiss National Bank, Bank of England and the European Central Bank to meet for the last time this year. Unlike the Federal Reserve, who raised interest rates again last night by 0.25% for the fourth time in 12 months, no changes are expected from any of them. The SNB is expected to leave its policy rate unchanged at -0.75%, while the Bank of England will also stand pat at 0.5% having raised rates back to 0.5% last month and partially reversing the stimulus it pushed into the UK economy at the end of last year.

The UK central bank is unlikely to change its view of the UK economy so soon after last month's inflation report, but the rise in the consumer price index measure of inflation to 3.1% earlier this week does vindicate the concern of some policymakers about the prospect of inflation starting to become entrenched. Given recent PMI data, there is a risk that we could see a couple more months of CPI at around the 3% level, although wages do appear to be showing some signs of starting to tick higher.

Today’s UK retail sales data for November is expected to pick up a little from the 0.3% rise seen in October, with a rise of 0.4% expected, helped by some of the deals that were run in the lead-up to Black Friday at the end of last month.

We finish off with the latest decision from the European Central Bank and here again we aren’t expecting any fireworks, with no change expected. At his previous press conference, President Draghi outlined the latest changes to the ECB’s bond buying programme and the central bank’s determination to keep policy fairly loose given the benign inflation outlook being seen throughout the region.

In the last couple of months there has been some evidence that inflationary pressures are starting to build up again in certain areas, particularly in Germany. More broadly CPI still remains well below the ECB’s target of 2%, at 1.4%, and as such while there is likely to be some division on the governing council about the speed of tapering next year, it's unlikely that we will see any great difference in the tone of the message than we saw at the last meeting. Anyone expecting any signal that we might see a rate rise before 2019 is likely to be disappointed.

On the data front the latest flash manufacturing and services PMI’s for France and Germany for November are expected to see a modest slowdown from the bumper numbers seen in October.

EUR/USD – has pushed above the 100-day moving average at 1.1800, and if that metric is held it may target 1.1961. A break below the 1.1800 mark could bring the 1.1700 region into play. A move below the 1.1700 area retargets the November lows at 1.1570.

GBP/USD – Now that 1.3420 has been cleared it could retarget the 1.3500 area and the highs at 1.3660. A move back below 1.3420 risks a move towards trend line support from the March lows at 1.3200, and below 1.3200 retargets the 1.3050 area.

EUR/GBP – currently has a short term top just below the 0.8870 area, and while below here the risk remains for a return to the 0.8740 area. A move through the 0.8880 level and 50 day MA retargets the 0.8980 area.

USD/JPY – the move back below 113.20 argues for a return towards 112.50 and then the 111.60 area. If 113.30 is retaken, we could now see a return to the recent highs just above the 114.00 level.


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