David Morrison  |  17/12/2018 08:00
Key Week Kicks Off
 
This is set to be the most important week of December as we head into the holiday period. The US Federal Reserve meets on Wednesday and is expected to raise its Fed Funds rate by 25 basis points. According to the CME’s FedWatch tool the probability of a rise is around 70% which suggests there are doubts that the US central bank will go through with it. But overall there’s a feeling we’ll get a dovish hike. In other words, the Fed’s FOMC will signal a slowdown in monetary tightening in 2019 when compared with its last forecast back in September.
 
President Trump has critisised the Fed and its Chairman Jerome Powell for raising rates. However, the US central bank is proud of its independence and it’s more likely that the Fed will point to a slowdown in global growth and lower inflation for a dovish pivot.
 
In Europe politics continue to drive markets. Over the weekend, the Italian government softened its position to the EU’s budget demands and agreed on a new package to send to Brussels. But Brexit remains the biggest concern. Last week Prime Minister Theresa May won her confidence vote and delayed parliementary voting on the withdrawal bill later in January. But there are growing calls for a second referendum and sterling continues to weaken against the US dollar.

Meanwhile, as you can see in this chart, the US Dollar Index continues to bump up against key resistance around 97.00. An upside break-out will see the index hit its highest levels since June 2017. But a failure now could lead to a retest of support around 96.00
 
Looking at this the other way round, the euro-USD continues to hold above support at 1.1300. This is despite last week’s sell-off which came in the wake of the ECB meeting which saw the bank announce the termination of its asset purchase programme. But ECB President Draghi tempered this hawkish move by noting that incoming economic data was weaker than expected.  The daily and weekly charts suggest the euro is coming under downside pressure which may build further should the Fed sound more hawkish than expected on Wednesday.
 
Continued market uncertainty has led to a pick-up in the price of gold. Bulls are hoping to see it consolidate above $1,240 and for upside momentum to build. Meanwhile, a break back to support around $1,220 can’t be ruled out, particularly if we see dollar strength after the Fed meeting on Wednesday.
 
Have a great week!

 

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