With less than two weeks left to Christmas we are still ahead of the most important market event of December and perhaps one of the key ones this year. The way the Fed communicates interest rate hike will have major implications for literally every market around the globe. Investors will therefore scrutinize the US data, while the Bank of England meeting is on top of the agenda in Europe.
The FOMC meeting (Wednesday: decision 7pm GMT, conference 7:30pm GMT)
We cannot stress enough how important this meeting is. The Fed is nearly certain to increase interest rates, a lack of such decision would be a shock to the markets. But this hike has been long discounted and the market reaction will focus on the communication. In our view a so called “dot-chart” will be crucial. The median dot saw 2 hikes for 2017 and 3 more for 2018 in September. If the median moves up market could see the move as a “hawkish hike” which in turn could be positive for the US dollar.
US data: retail sales (Wednesday, 1:30pm GMT) and inflation (Thursday, 1:30pm GMT)
Retail sales and inflation are just behind the NFP report in terms of significance for the markets. However, this time their impact might be starkly different. The retail sales data will be released ahead of the FOMC meeting and it may have an important effect on positioning ahead of the decision while the CPI might get lost a bit in the post FOMC environment. The sales data has been very strong so another strong reading could reinforce positive sentiment towards the US dollar just ahead of the FOMC decision.
The Bank of England meeting (Thursday 12:00am GMT)
The Bank of England is highly unlikely to change policy parameters this month but it will publish minutes from the meeting. The MPC was pessimistic about the economy in the longer haul when it met in November. However, the data has been generally upbeat since then. Retail sales was strong, wages ticked up, trade balance improved and only industrial output disappointed. We doubt the BoE could change its view but even a slight improvement in the assessment could benefit the GBP.