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UK GDP and Federal Reserve in focus

After pushing up to new record highs yesterday the DAX and CAC 40 ended up closing lower on the day, as caution set in ahead of today and tomorrow’s final central bank meetings of 2023, starting with the Federal Reserve later this evening.

US markets, on the other hand continued their recent optimistic bias with both the Dow and S&P500 closing at fresh 2023 highs, after US inflation slowed modestly to 3.1%, even as bond yields edged higher.

Despite this positive US finish European markets look set to open mixed.

US CPI inflation for November showed itself to be slightly firmer than expected on a core basis, while in the UK, wages data for October slowed slightly more than expected to 7.3% from 7.8% in September, keeping markets in limbo as to the timetable of rate cuts next year.

Today’s monthly UK GDP numbers, as well as the manufacturing and industrial production numbers, look set to reinforce the challenges facing the Bank of England as they look to squeeze inflation out of a UK economy that is struggling with still elevated inflation and squeezed consumers.      

With the UK having just about avoided a contraction in Q3 some of the more recent economic data as we head into Q4 has shown a modest improvement, raising the prospect that the UK economy might avoid a recession at the end of this year.

When you consider that a year ago both the IMF and the Bank of England were predicting a long recession that is no small feat. That’s not to say that everything is fine and dandy, it isn’t, but sometimes it’s too easy to be bleak.

In September the UK economy managed to expand a modest 0.2%, with consumers feeling the squeeze from higher rates throughout the quarter, as well as various public sector strikes.

Fortunately, rates have come down from those eye-watering summer peaks, easing some of the pressure on hard-pressed consumers, although mortgage arrears have been rising, while recent PMI numbers do offer some hope of optimism.

As Q3 gets under way today’s monthly October GDP will offer an insight into Q4, although various weather-related events may also impact the figures, with an expectation of a contraction of -0.1%, with similar weakness expected in industrial and manufacturing production.

When the Federal Reserve kept rates unchanged back in November for the second meeting in a row there was still the distinct possibility that the final meeting of 2023 would provide the possibility of one more rate rise to round off the year in line with Fed policymakers dot plot forecasts of 5.6%.

In the weeks since then the prospect of that now happening has disappeared to almost zero, despite Fed chair Jay Powell insisting at the start of this month that the prospect of more hikes was still a possibility and rate cuts could well follow in the coming months. We do know that Fed policymakers have guidance of a Fed Funds rate of 5.1% at the end of next year, however markets are increasingly of the opinion that we could see more than that, with the first expected to be delivered in the summer of next year.

At his November press conference Powell insisted that no decisions had been made on whether more rate hikes were coming. He went on to say that while financial conditions had tightened, policymakers weren’t confident that policy is sufficiently restrictive, although they had come a long way.

While this was a view repeated just prior to the blackout period, other policymakers have already shifted their stance with one hawkish member Fed board member Christoper Waller saying that monetary policy was currently well positioned to slow the economy and get inflation back to target. He went on to say that if disinflation starts to become a concern, then rates could be cut in response, in a sign that the ground is now shifting, and that rates have peaked.

The recent bond market reaction could be a cause for concern for some Fed members if the slide in yields prompts financial conditions to loosen just enough to prompt an inflation rebound. That doesn’t mean we will see another rate hike, no change is expected, but it could prompt the FOMC to look at their dot plots for next year and be wary of altering them in any way that could be considered dovish. 

EUR/USD – yesterday’s rebound ran out of steam at 200-day SMA yesterday at 1.0830, before slipping back. We need to push above 1.0830 to signal a move higher. Support just above the 50-day SMA at 1.0720.

GBP/USD – finding support just above the 200-day SMA above 1.2500. A break below the 200-day SMA and the 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area. 

EUR/GBP – popped above the 0.8600 area yesterday before sliding back with support still at the lows at 0.8545/50. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.

USD/JPY – after last week’s test of the 200-day SMA at 142.50 we’ve seen a solid rebound with the move higher running out of steam at 146.60 before slipping back to support at 144.70. While above 144.70 we could see an extension to 148.00.

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