Year-end and expectations!
Finally, we are in the last month of 2021 and now have to see what we had and can have in the last month of the year to close this interesting and very volatile year. This month we will have many central banks meetings as well, while we have to focus mostly on FED and ECB meetings. Let's review together the month ahead and see what we have thee to watch closer.
USD: With many signals from a stronger US economy, USD hit its 16-month highs in November, as it was the sign for FED to have more Hawkish policies and maybe increase the tapering amount. Also, the re-nomination of Mr. Powell by President Biden for the second term, helped the chart's bulls, as he is more hawkish than Mr. Lael Brinard, as another possible candidate for this post. November we had fast increasing inflation in the US with 6.2%, however, inflation also could not stop consumers to buy more and retail sales increased by 1.7%. December started with the fears of the Omicron variant of Coronavirus and the possibility of another round of lockdowns. This news increased the holding of the current Dovish policies and put some pressure on US Dollar, however, updates confirmed that it is not more dangerous than the Delta variant. Therefore, again the earlier expectations are back and now we are waiting even for more tightening policies. More Hawkish policies will increase the US dollar rate. So far, DXY increased more than 7% in 2021 and it is preparing to print its largest annual gain in six years. For the rest of December, we have to follow the US trade data (7th), Inflation numbers (10th), FOMC meeting (15th), and Industrial Production (16th), and Final Q3 GDP numbers (22nd) to find the best trend for DXY movements.
Euro: Along with weaker economic data in Eurozone compared with the other economies, fast-spreading coronavirus in most of the European countries also was another reason to see the Euro a bit weaker against its crosses, including US Dollar. Put these data and news together with Dovish policies of the European Central bank, comparing with its American counterparts, then you can understand why EUR/USD fell under 1.12 level. For December, we already had some positive data from Eurozone. Also, virus concerns have already gone, for now, so with lower risk in the markets, we can see the Euro at a bit higher levels. Anyway, it is all about the European central bank and its monetary policies. If ECB does not change its policies and hold the current rates and emergency QE, we can still see the pressure on Euro. On the flip side, changing the policies can support the Euro. So we have to wait and see the ECB's meeting on 16th. Other events that we have to watch for Euro are the European Council meeting (16th), PMI numbers (23th), and inflation numbers on December 30.
GBP: While UK producer price inflation tested 13-years high in October and consumer inflation increased by 4.2%, which is the highest rate since December 2011, BoE did not change its monetary policies and interest rates to put the Pound under pressure. On the other hand, increasing market risks also usually weigh on sterling, which we had so often last month. In the month ahead also we will have more risk and volatility with central banks’ monetary policy meetings, health conditions, and inflation numbers, and conflicting economic outlooks. Increasing market risk is not in favor of the Sterling. Technical indicators also remain bearish. Despite the geopolitical news and events, we also have to follow the many economic data, including GDP and Trade balance (10th), Labor market data (14th), Inflation (15th), BoE monetary policy meeting (16th), Retail Sales (22th), Final Q3 GDP (23rd), and finally PMI and consumer Confidence at December 23rd.
JPY: As always we have to check the US bond Yields to find where the Japanese Yen going to go! Since November we had increasing bond yields in the US markets, the Japanese yen has tested its lowest level against the US dollar in the past 4 years above 115. At the same time, It was very strong against Euro and Pound, printed its largest monthly gain in a year. For the month ahead, while we have to follow the economic data, however, should not ignore the Corona Virus effects, Chinese housing market difficulties, and international geopolitical tensions (Mostly in Ukraine and Thailand). Increasing risk in markets will increase the Yen's demand. On the economic data front Q3 GDP (8th), G7 summit of foreign & development ministers (10-12th), US interest rate decision (15th), PMI and Trade Balance (16th), BoJ monetary policy meeting (17th), and finally, Inflation numbers (24th), are the most important data to watch.
Gold: It is more than three months that Gold can not find the exact direction to move. We have many reasons that at the same time can increase the Gold price and put it under pressure. After touching its highest level since September at $1,876 on November 16, in response to the central bank's decisions, the yellow metal could not save the gains and fell to 1,761 USD on December second. The gold price can decrease with stronger USD, but now the US dollar is stronger because of increasing the market risk and the possibility of more tightening policies from FED. This policy also will put more pressure on stock markets and money flow to the safe havens, therefore Gold's safe-haven demand is increasing. For December, we have some factors to watch to understand the Gold reaction and direction, including US inflation, latest updates from coronavirus spreading situation, and major central banks monetary policy meeting like BoE, ECB, and more specifically US FED. For December, most of the price expectations are above 1,800 and less than 1,840 US dollars.
Oil: Energy price eased 6.4% in November, the largest monthly decline since April 2020, however it holds still more than 100% gain compared last year. The main reason for free fall in the last days of November and the beginning of December was the fears after the reports about the latest variant of the coronavirus called Omicron. However, with time passing, positive news about that, and elimination of worries, the energy market again started to recover and so far, it is gaining more than 8% from the December low seen on the Second day of the month. December 2-3, Opec Plus members had a meeting, and they did not change their supply level and quotas. December 7 also, we had EIA's short-term energy market outlook. For December, the expectation for US crude oil price is around $71. Winter is cold, and now the fears of another round of lockdowns are over, therefore for holidays, we need more energy to travel and warm ourselves, demand is increasing, and market sentiment for Oil and generally oil prices are positive.
Wall Street: November was not the favorite month for Stock markets. In the beginning, markets increased. But later and with better than expected economic data and increasing inflation numbers, expectations from central banks increased to have more tightening policies, therefore stocks were under pressure. The soft reduction process got faster with Omicron concerns in the last days of the month and ended with a 2.9% decrease from the latest all-time high of SP500 with a 0.8% fall in November. Dow Jones Industrial Average (DJIA) also tumbled 3.7% to print the worst monthly performance since March 2020. Despite all corrections, leading indices in Wall Street still trading more than 25% higher than a year ago. December is full of events and economic data, which will make it very volatile. More than anything it is FOMC monetary policy meetings that create the direction for markets. With higher inflation expectations and great economic data, we are waiting to see more Hawkish tones and even decisions from FED, therefore, it is not going to be a bullish month in the end for stock markets according to most analyst estimates.
