Financial markets saw a shake-out early this week on the back of the more hawkish Fed, now signalling a rate hike already in March when tapering of asset purchases is done. US 10-year bond yields continued to rise to 1.8% and stock markets took a dive. Money markets now price close to 100% probability of four hikes from the Fed this year, which seems fair. However, calm was restored in the middle of the week after Fed governor Jerome Powell argued that the Fed would be able to tame inflation and that it could happen without too much damage to the economy. But yesterday stocks took a dive again in response to hawkish comments from more Fed members.

Another new high in US inflation in December at 7.0% y/y, the highest level since June 1982, was digested fairly well by markets. The increase was in line with consensus but core inflation surprised slightly to the upside rising to 5.5% y/y (consensus 5.4% y/y) from 4.9% y/y. The muted market reaction to the number would suggest that high inflation is to a wide extent already expected by the market. We look for inflation to stay high in the short term as for example the latest increase in used car prices in the US is not yet fully factored into CPI. The same goes for the CPI shelter component. But from Q2 22 we expect price increases to gradually taper off. Inflation is set to be high for all of 2022, though, and with the tightest US labour market in decades the Fed needs to act to rein in inflation.

Despite the hawkish turn of the Fed, EUR/USD moved higher this week. It has been looking technically oversold for a while and with investors still being long USD, there seems to be some profit taking on this trade. However, we see scope for USD turning stronger again as the Fed departs on its hiking journey in a few months.

In China inflation pressures are easing as producer prices (PPI) saw the biggest monthly drop (-1.2% m/m) since April 2020. The decline is due to lower commodity price inflation; we believe this will soon lead to a peak in PPI and headline CPI in US and Europe as well. Falling inflation pressure leaves room for PBOC to ease policy further in coming months.

Omicron continues to drive big waves of Covid around the world. But there are also signs of a peak in some European countries and the Northeastern US states that have been hit the worst. It adds to hope that Omicron will not overwhelm hospitals and could mark the end of the pandemic as we know it. Of course, the risk of new mutations also still looms.

Talks between Russia and US/NATO this week did not change much. Russia stated yesterday that they regarded the talks as unsuccessful but had the will to continue talks. In the paper Research Russia – Expect serious market disruptions if a war breaks out, 14 January, we look at different scenarios for the conflict.

The coming week looks to be fairly uneventful. China kicks off the week with GDP for Q4 on Monday as well as industrial production and retail sales. They will likely confirm that Q4 was weak. We look for a cut in China’s policy rate. In the US we get regional business surveys (Philadelphia and Empire) and in Europe, we expect to see the German ZEW and Euro consumer confidence to decline due to the triple headwinds of Covid outbreaks, supply bottle necks and an erosion of household income from the high inflation, see Euro Macro Monitor – Tripple headwinds, 10 January 2022. On Thursday, the Turkish central bank may cut rates.

Download The Full Weekly Focus

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

AUD/USD remains pressured towards 0.6900 on Australian jobs negative surprise

AUD/USD remains pressured towards 0.6900 on Australian jobs negative surprise

AUD/USD stays directed towards 0.6900 following a negative surprise in the Australian Employment Change data. Softer wage and jobs data will likely dissuade the RBA from aggressive tightening. Investors assess Fed minutes and US-Taiwan news. 


EUR/USD drops towards 1.0150 amid risk-aversion, ahead of US data

EUR/USD drops towards 1.0150 amid risk-aversion, ahead of US data

EUR/USD turns south after rejection at 1.0200 as risk-off flows dominate. US dollar finds demand, despite weaker yields and cautious Fed minutes. The euro looks vulnerable amid the deepening EU energy crisis and growth risks.


Gold eyes a daily close below 21 DMA for further downside Premium

Gold eyes a daily close below 21 DMA for further downside

Gold price is fading the early bounce this Thursday, as the US dollar is seeing renewed buying interest amid the extension of risk-off flows. Dire Chinese economic outlook combined with Fed’s caution on a potential downturn keep investors on the edge.

Gold News

Shiba Inu price to provide another opportunity before a 50% upswing

Shiba Inu price to provide another opportunity before a 50% upswing

Shiba Inu price is on the verge of triggering another run-up, but it needs to allow investors who partook in the previous rally to book profits. As a result, more market participants are likely to flock around the next support level, triggering another leg-up.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!