GemForex - weekly analysis

The dollar suffered its biggest two-day decline on Friday since 2008. As we begin a new week, the market appears optimistic due to prospects of a Fed pivot,  and the Russian pullout from Kherson, a strategically significant Ukrainian city. Weaker-than-expected US inflation figures, which brought attention to the Fed's much-anticipated shift to slower rate rises, continue to be the main factor influencing risk sentiment.

The University of Michigan consumer confidence indicator for the US came in lower than anticipated across all metrics for November, which strengthened this narrative on Friday. The market is currently encouraged by poor data as a weakening economy strengthens the case for a FED pivot. 

The market had anticipated a Republican victory in the upcoming midterm elections, but that expectation has not come to pass, and Democrats continue to hang onto control. A political wrinkle has been added by the fact that the Republican triumph in the House of Representatives has not yet been declared, while the Democrats have won the Senate election after winning seats in Arizona and Nevada.

For observers, this demonstrates how the Trump name has become poisonous for the Republican party, and the likelihood that he will run for president in 2024 has decreased as a result of the severe defeats inflicted on his preferred candidates. Even though a divided Washington is typically good for the economy and stock markets, the Democrats still hold the majority in both the White House and the Senate.

Overall, US political developments favor a continuation of the stock market rally we saw last week, though we might not see as many significant gains because of persistent problems, such as weak Q3 earnings and a weak Q4 outlook, a dismal outlook for key lead industries like the semiconductor industry, and the possibility of a weak economic outlook in 2023, which could restrain market euphoria in the upcoming days and weeks.

From the other side of the Atlantic, the UK is also under the spotlight this week as the Chancellor's Autumn Statement is scheduled to be released on Thursday. This is the UK's second effort at a budget in just under two months, following the disastrous mini budget from back in September, as we mentioned above. This time, there is a totally different mood music since it is anticipated that the Chancellor will reduce spending while increasing taxes for almost all tax-paying groups.

In another news from the land of the rising Sun, Bank of Japan governor Kuroda mentioned that Japans economy is picking up. The impact of the supply constraints and the pandemic eases, and BoJ seems stable and sustainable achievement of the price target set. Foreign investors have been net buyers of Japanese stocks of late as the strong earnings outlook of some domestic companies boosted investor sentiment. Kuroda expects CPI growth of around 3% for this year but expects it to fall to around 1.5% next fiscal year. Nevertheless, the BoJ chief mentioned that the key is to stay vigilant to uncertainties over the economic outlook, especially risks from foreign price trends and other overseas economic risks. 

Following the remarkable surge seen last week, the EURUSD has been battling to maintain its bullish momentum at the beginning of this week. The US Dollar suffered significant losses versus its main rivals as a result of soft October Consumer Price Index (CPI) data from the US, which also led to a risk rally in the second half of the prior week. Additionally, as investors continued to reduce their bets on a second 75 basis point US Federal Reserve rate hike in December, US Treasury bond yields fell lower and put additional pressure on the US Dollar.

As we start a new week, attention is on US PPI (Producer Price Index) inflation, retail sales, the Philadelphia Fed survey as well as Fed speakers. Their response to the weak US inflation figures delivered last week will be monitored closely and their comments, therefore, could further rattle financial markets.

On Monday, there will not be any significant data releases from the United States, but investors will be closely monitoring Fedspeak. Later in the day, Federal Reserve Vice Chair Lael Brainard and NY Fed President John Williams are scheduled to speak; if they disagree with the market's optimism, EURUSD may find it challenging to gain momentum.

Q3 GDP, EUR Core CPI, and the German ZEW release are of interest from Europe, while several significant macroeconomic data releases are expected for the UK. As previously indicated, the UK chancellor Jeremy Hunt's Autumn Statement on Thursday, employment statistics on Tuesday, inflation data on Wednesday, and retail sales on Friday are all things to keep an eye on.

Consequently, domestic UK markets will be interesting to monitor this week. On Tuesday, together with the UK Prints, a raft of Chinese data will be released, and on the last days of the week, we will see CPI prints for Japan along with the Retail Sales data for the UK.