What Drove the Market the Week Dec 12 – 16; Fed and BoE Hogged the Limelight

Fed raised rates and signaled more than three rate hikes in the next year pushing the dollar up to fresh highs while BoE left its monetary policy on hold ahead of Brexit. Meanwhile, the euro is traded subdued in the background, overshadowed from the volatility in U.S. and U.K.'s currencies.

The FOMC has voted to raise its fund rates by 25bp to 0.75% as it was expected and surprised positively as it raised the number of rate cuts in the next year to three from two before, on the dot plot. Moreover, Fed Chair Yellen described next year's forecast for three rate hikes a "very modest adjustment" raising optimism that we may see tightening of more than 75bp in 2017. The U.S. dollar traded sharply higher following Fed's announcement and Yellen's statements, pushing the U.S. dollar index to 14-year high above 102.00 and EUR/USD down to 14-years low at 1.0366. Moreover, the USD/JPY pair climbed up to a fresh 13-month high. No one was surprised from the rate high, though the dot plot forecast shows that policymakers are looking for three rates hikes in 2017 and Yellen's endorsement of that hawkishness shored up the dollar.

The BoE monetary policy committee voted unanimously to keep rates unchanged at 0.25% and keep QE program also on hold, as they wait to see the effects on the economy from the ongoing developments with Brexit. The policymakers also predicted a "slightly slower path" for inflation, though it still expects to overshoot the 2% target later in 2017 and through 2018. The decision in collaboration with dollar's increased demand sent the GBP/USD pair below 1.25 and depreciated the currency, overall, against most of the G10 currencies.

U.S Dollar – United States

• Inflation Report: The U.S. inflation report showed that consumer prices picked up 1.7% yoy in November from 1.6% in October, the highest since October 2014, mainly boosted by high energy prices while food prices keep falling.

• Retail Sales: The retail sales grew just 0.1% mom in November, from a downward revised figure to 0.6% the previous month.

• Producer Price Index: PPI jumped to 1.3% yoy from 0.9% yoy which was the forecast and 0.8% yoy the actual the month before.

• Housing Market: The NAHB housing market index for December lifted to 70 versus forecasts of 63, showing that the housing sector experiences solid improvement.

• NFIB Business Optimism Index: The index rose 3.5 points in November to 98.4 from 94.9 in the previous month and surpassed the predictions for 96.7.

Euro – Eurozone

• Inflation Report: The headline CPI figure remained unchanged at -0.6% in November, as expected.

• ZEW Survey: The economic sentiment increased at 18.1 for December, the highest sentiment in 6 months, from 15.8 before.

• Employment Change: The employment change rate declined to the lowest since the fourth quarter of 2014 at 0.2% Q3 qoq from 0.4% in the previous quarter.

• Industrial Production: The industrial production index s.a. slowed down to 0.6% yoy in October from an upwardly revised figure to 1.3%.

• Markit PMIs: The manufacturing sector expanded to 54.9 for November from 53.7 in the previous month while the services sector ticked lower at 53.1 from 53.8 before according to the preliminary Markit PMIs - figures above 50.0 indicate expansion while below 50.0 indicate contraction.

British Pound – United Kingdom

• Inflation Report: The headline CPI for November showed that consumer prices picked up 1.2% yoy versus a growth of 0.9% in October, the biggest increase in two years boosting the pound temporarily. The core CPI also surpassed market expectations, rising up to 1.4% yoy from 1.2% before and market consensus of 1.3%.

• Employment Report: The unemployment rate remained on the same pace in the three months until October at 4.8%. while the average earnings for the last three months until October rose at 2.5% a bit higher from the expectations, as well as from the previous months at 2.4%.

• Retail Sales: The retail sales expanded by 5.9% yoy in November, as expected, from the previous month of 7.2%.