The last important market week of the year is about to begin. It will be full of meetings of the most influential central banks, with the Federal Reserve's decision in particular awaited. An acceleration of policy normalisation, which would be unfavourable for the currencies of a basket of emerging economies, is in the air.
The annual inflation rate in the USA rose from 6.2 to 6.8%, the highest since 1982. This reading was not above market expectations - it was in line with them. Last year, such a situation was rare, as the data fell below forecasts only once this year. This may have somewhat limited the scale of the positive reaction of the US currency. The EUR/USD is back under 1.13.
Dollar benefits from record inflation in the US
Consumer prices made another strong jump (0.8% month-on-month) on a monthly basis. It should be assessed that price pressures have already spread across many categories and are widespread throughout the economy. The index excluding food and fuel rose by 0.5% month-on-month. It should be estimated that the current values of inflation dynamics are well above the Federal Reserve's "pain" threshold.
The most important week of the end of the year
Consequently, a shift towards a more restrictive policy is likely to continue at the upcoming FOMC meeting (with the finale as early as Wednesday at 8 p.m.). This means that the Fed should announce a more decisive tapering of asset purchases, regardless of the new epidemic risks. The end of this process should still take place in the first quarter of next year, three months ahead of the initially (back in November) planned deadline. This, in turn, paves the way for faster interest rate rises, which should be reflected in the new forecasts and is an opportunity for a stronger dollar. However, it is important to recall that aggressive policy normalisation is already largely priced in, and new records of dollar strength are not our baseline scenario.
This week the Norges Bank should raise interest rates for the second time this year. In our opinion, the rapid depreciation of the Norwegian krone has ended, and the currency should recover - the local lows against the euro and the zloty should be behind us. One of the central banks that will most likely change their plans under the influence of the omicron discovery is the Bank of England. The tightening cycle may not start until February. This is a kind of a repeat event, as in November, the fate of a rate hike was on a knife-edge, and its absence hit the currency. This time the disappointment should be far less pronounced.
Important news should also come from the eurozone. Economic growth slowed down to practically zero in Q4. The industry has been struggling with bottlenecks for many months, and a new wave of illnesses and restrictions will hit private consumption. An important indication of how resilient the sentiment is will be given by the preliminary readings of the PMI indexes, the leading barometers of the economy, scheduled for Thursday. On the same day, the European Central Bank will make its decision. New growth and inflation projections will be released, which will determine the strategy for ending the pandemic asset purchases. The coming days should once again highlight that the ECB is several steps behind the Fed in abandoning its crisis instruments, which traditionally favours the dollar.