This week will be the last trading week of the year with a heavy-loaded economic calendar which is likely to bring elevated market volatility while our trading instruments could experience large swings. All the action could already start tomorrow with U.S. inflation data due, followed by significant monetary policy announcements from the Federal Reserve on Wednesday and the Bank of England and the European Central Bank on Thursday.
Looking for interesting trading opportunities, traders should keenly watch tomorrow’s U.S. inflation report to assess the validity of prevailing interest rate expectations for 2024. Inflation is projected to continue to fall but progress towards the Fed’s target is likely to be limited and this situation could prevent FOMC policymakers from adopting a more dovish stance at their rate decision on Wednesday.
All three central banks are expected to hold their policy settings steady, so the focus will be on the forward guidance and projections. As for any interest rate projections going into 2024, Fed Chair Jerome Powell may have room to be somewhat more hawkish than his counterparts at the ECB and BoE, given the resilience of the American economy. This fact could support the USD against other peers. The market, however, has completely priced out any chance of additional tightening by the Fed. The central bank will release the updated dot plot projections on Wednesday while market participants are betting that the Fed will cut rates five times in 2024, with a 25bp rate cut fully priced in for May. If the Fed predicts fewer cuts, the dollar could extend its recovery on the back of the hawkish signals.
As for the ECB decision on Thursday, it is expected that policy makers will keep the deposit rate at 4.0 percent for the second meeting in a row. Given the weakening economic backdrop, the market is speculating that the ECB will be the first major central bank to cut rates, possibly in April. In other words, there could be further losses for the euro.
Also, the British pound is unlikely to gain much against the greenback unless the U.S. dollar sells off. Even though, the BoE is likely to dampen speculation about an early rate cut, gains in the pound might be very limited.
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Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.
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