With little out in the UK and Eurozone this week, attention was focused on the US. More specifically their employment and GDP data (with GDP coming out slightly stronger than expected at 2.9%) being at the forefront of trader’s analysis this week. With GDP being a significant indicator of recession coupled with the latest data on employment (which has been extremely tight in the past few months) it has given the markets it’s biggest indication of how the US economy is facing up to increasingly difficult conditions and gave a real indication as to how the Federal Reserve are likely to act in their last interest rate decision of the year (scheduled for the 14th). After a number of Fed representatives have indicated recently that they are expecting to slow down their hikes to 25bp in the new year, with the likelihood of them slowing down to 50bp at the next decision sitting at 80% (up from 66% this week); this is the first major news to come out (since these comments were made after the Feds last 75bp hike) that has given traders an insight into what the Central banks may intend to do moving forward.

It therefore came as no surprise that Jerome Powell’s speech Wednesday evening gave strong signals that the Federal Reserve will begin to significantly reduce the size of its increases to its base rate, and, most notably, that it may start as early as the next decision in December. In an otherwise hawkish speech (perhaps in a bid to combat the inevitable weakening in the USD following his indications on the next interest rate hike) he did go on to state that the inflation rate in the US is still significantly above target and went as far as to say “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” Criticising the Federal Reserve’s previous forecasts on the state of the economy as being too optimistic.

This led to another week of multi-month highs, with EUR/USD nearly breaching 1.060 for the first time since June this year. The US’s major competitors will hope the risk-off mood surrounding the US market continues into the new year. With the Chinese market being inherently linked to the strength of the USD, it appears likely that this sentiment will continue into the new year. Protesters in China staged the largest protest since Xi Jinping became President of the Chinese Communist Party, with controversy surrounding the Government’s policies on Hong Kong, and Taiwan, government censorship and zero-covid taking centre stage. Considering China makes up around 11.7% of global exports (with most of it being paid for in USD) it will be interesting to see how and if this continues to be a major drawdown for the USD.

Later today, we will receive the US employment data (1:30pm GMT) should this come out soft, we will likely see the USD be tested once again. With little out next week bar PPI and PMI services in the US, it will be difficult for the USD to regain the ground they have lost over the last week. At last, USD strength seems to be wavering, with hopes the Sterling will get back to the levels seen at the beginning of this year becoming more and more realistic.