FX Midweek Outlook 15/12/2022

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Recap US CPI

The headline CPI figure has declined further, printing 7.1% versus 7.3% expected, and sizably lower than 7.7% previously. It has also slowed down to 0.1% on a month-over-month basis from a previous reading of 0.4%. 

Source: Trading Central

From the chart above, inflation is seen to have peaked in June and was on a steady decline since then. The more interesting thing to note is that the CPI has surprised (positively) the markets for two months in a row. Inflationary pressure eased by more than expected in November to its lowest level in almost a year, strengthening the beliefs that the Fed ‘has to’ soften its hawkish stance and gradually ease its tightening policies. 

And yes, they did. The Fed followed through with the lower 50bps hike that Powell so strongly signaled in his previous speech in November. 

Wednesday: FOMC Meeting

Despite the result being as anticipated, there is still plenty of information for the markets to digest around the Fed’s monetary policy statement, its economic projections, and what Powell said in the press conference. Let’s break it down briefly.

> Fed’s Monetary Policy Statement

There were only slight changes to the statement with them being

  • an acknowledgment that the Russian war is not just creating additional upward pressure on inflation but is contributing to it
  • revised up the target interest rates from 3.75-4.00 to 4.25-4.50 percent

> Summary of Economic Projections

Source: FOMC

  • Median interest rate for year-end 2023 was revised up to 5.1% compared to 4.6% in its previous projection
  • For year-end 2023, the median fed funds rate increased to 4.1% vs 3.9% previous
  • For year-end 2025, the median fed funds rate increased to 3.1% vs 2.9%

What does this mean?

The Fed members believe that the interest rate needs to remain at a higher level for a longer period of time

Other than that, they’ve also

  • Revised up inflation estimates for 2022, 2023, and 2024
  • Revised down the unemployment rate for this year, and up for 2023 and 2024
  • Revised up real GDP growth estimates for this year, and revised down for 2023 and 2024

What does this mean?

The Fed members think that inflation will be sticky and linger around longer than expected, and a potential slowdown in economic activities.

> Dot Plot

The majority of FOMC members believe that the appropriate Fed Funds Rate target range should stay above 5% until the end of 2023. 

> The Press Conference

Key Takeaways

  • No rate cuts until we see more proof of slowing inflation 
  • No judgments on the size of the next rate hike
  • Labour market is still tight
  • Restrictive policy likely needed for some time
  • China reopening is not likely to have visible effects 

To reiterate, Powell emphasized that terminal rates matter more than the pace of getting there. He has also indicated that interest rates will remain high for some time until there is enough evidence pointing to a slowdown in inflation.

Additionally, a rate cut is not an option in the year to come with Powell saying that we still need to see a decline in the Core PCE price index  (the Fed’s favorite gauge of inflation) and that the labor market needs to loosen up further (unemployment to rise and average hourly earnings to fall)

How did the market react?

Inflation data came out lower than expected, suggesting that inflation is cooling faster than anticipated and the US dollar plunged hard as a result. The Fed came to the rescue afterwards and the dollar recovered slightly. 

Take USDJPY for example,

USDJPY Hourly Chart

USDJPY fell off the cliff and lost 180 pips in just under 60 seconds, and a total decline of 267 pips due to the softer inflation data. It then began to consolidate until the FOMC event took place. A “no dovish” stance from the Fed buffed up the greenback by a little, aiding the pair to recover half of the inflation data-driven down move. 

Next UP

After the Fed, it is now the turn for three other major central banks to announce their next moves. 


In half an hour from now, the SNB will announce its policy rates and monetary policy assessment and holding a press conference after. The market is expecting a 50bps hike to 1 percent. As we all know, Switzerland does not usually raise its interest rates, so the statements they make are interesting precursors, especially for the European economy. 


The BoE is scheduled to announce its official bank rate at 7 am EST today, and a more conservative 50bps rate hike is expected (compared to a 75bps hike last month).  With inflation reaching 41-year high of 11.1% in October and the economy is seemingly going into a recession, possibility of an outsized hike by the BoE is low.

The key focus will then be on the vote split. According to Bank of America, the possible outcome for the vote split could be  “one member voting for no change, one for a 25 bps, five for a 50 bps, and two for a three-quarter point increase,”



The Sterling has surpassed the pivot point of 1.23000 after the FOMC Meeting and ahead of the BoE interest rate decision. The question then becomes will the BoE event changes the course of the pair. If BoE is perceived to be more dovish than expected, it could potentially undo the recent price advance. 


The ECB will take the stage an hour after BoE’s show. It is expected to lift rates by a smaller margin, a 50bps hike compared to the 2 recent 75bps hike as inflation is showing signs of peaking and recession is looming for the eurozone.

While more dovish members of the ECB’s Governing Council are hoping for a delayed launch, some have urged for quantitative tightening to begin by March or even before.

Ru Yi 
Financial Market Analyst

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