The past week featured quiet volatility on FX and equity markets. The key gauge of US equity’s performance, the S&P 500, oscillated in a relatively narrow range (4050-3930) and is likely to end the week in the red. The price tested the 200-day moving average from the bottom up, but could not move much higher nor consolidate above the curve. The ISM report in the US non-manufacturing sector, released on Monday, somewhat cooled down the buying pressure in equities as the headlines reading, contrary to expectations of a slump, indicated a rebound in activity. The service sector employs about 70% of workers in the US, so measures of activity in this sector are used as a proxy for expansion of the US economy as a whole. The overall activity indicator rose from 54.4 to 56.5 points (forecast 53.3 points):It was quite unusual to see a strong positive momentum in the face of the Fed's reduction of monetary support at a rather late stage, when the effects of the tightening should have already been reflected in the level of economic activity. The hiring index got into the positive zone (for the first time in several months), the market probably took this as a sign of continuing imbalance in the labor market (where demand is higher than supply) and, perhaps, revised down the chances of a Fed Pivot next week. As a result, risk assets corrected downward.G10 central banks have been raising rates this week and maintaining a hawkish stance. The Australian Central Bank raised the rate by 25 bp, the Canadian Central Bank by 50 bp. Both have opaquely hinted that interest rates will be even higher in the new year.China's foreign trade data for November was a negative development for risk demand. Exports in November decreased by 8.7% in annual terms (forecast -3.6%), while imports fell by 10.6% (forecast -5%). The easing of covid measures in the short term is expected to have a stimulating effect on the Chinese economy, but the longer term is clouded with the risks of a surge in cases, a return to tough measures and, consequentially, a blow to investor’s sentiment in the broader market.US labor market data released on Thursday unexpectedly showed that the average duration of unemployment increased again. The number of continuing claims for unemployment benefits rose from 1.609 million to 1.670 million, while initial claims rose in line with expectations (230K):Today's calendar includes U. of Michigan Consumer Sentiment and Inflation Expectations report and the US Producer Price Index for November. Last month, the markets’ reaction to the report was significant on a dovish surprise which was quite unexpected. We can assume an asymmetric market reaction to the bullish surprise this time, given the favorable dynamics of a number of inflation indicators in the US in October, the market may underestimate its re-acceleration, so a surprise on the upside could cause a decent bullish reaction in the dollar. In the foreign exchange market, the theme of seasonal weakening of the dollar in December continues to weigh on trading in major currency pairs. EURUSD, GBPUSD are approaching corrective highs again – 1.06 and 1.2350, however, so far, they have modestly pressed against these levels without any attempts to break through. The situation is reminiscent of the classic “buy the rumor”, where the rumor is the idea that the FOMC will signal the imminent end of the tightening cycle next week, thus recognizing that the worst of inflation is over. However, the facts may not be so promising: the ISM report in the services sector and the pace of wage growth in November showed that the Fed not only has a solid foundation in the form of a strong economy, but also arguments to continuing hiking rates and make hawkish forecasts. In my opinion, the chances of disappointing market expectations are higher than a dovish outcome of the meeting, so the dollar has a good chance to rebound next week.
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