With little out this week it is of no surprise that the markets remained relatively stable with Sterling clinging on to recent gains against its major competitors. The latest PPI data in the US is due out this afternoon and with it being the stand-out data of the week, traders will analyse the results closely to see the extent to which the US interest rate hikes are beginning to curb inflationary pressure. Seeing as the next interest rate decision is out in the US in less than a week (14th December) today’s data, coupled with CPI readings out Tuesday, will give the Fed a last look at the state of the economy before they make perhaps the most highly anticipated interest rate decision of the recent, Covid influenced, economic downturn. As discussed last week, Jerome Powell’s speech stating that the Fed will begin slowing down their interest decisions will make today’s data and next week’s CPI even more poignant as we attempt to decipher whether the US economy is ready for such measures. The BOE was heavily criticised for its slow uptake in increasing their base rate to combat inflation and the Fed now risk coming under the same pressure should they begin tapering their interest rate decisions too early.

In many ways, recent weakness in the USD, following a period of extreme strength, could be a benefit to the US economy; with export sales beginning to falter in the US, it was becoming increasingly apparent the USD strength was pricing them out of selling to the rest of the world. With China predominantly using the USD for its own exports, they will perhaps be breathing a sigh of relief that the recent risk-on attitude towards the USD is beginning to subside. However, the Chinese seem to be creating enough problems for themselves without worrying too much about what is happening in the rest of the world. With the backdrop on some of the most intense pressure President Xi has seen in his 9 years in charge, the Chinese Communist Party this week announced they will be moving away from their highly controversial zero-Covid policy. Although highly likely to be an attempt by Xi to improve his popularity, importers around the world will likely be jubilant as lead times decrease and uncertainty surrounding sudden closures of ports subsides. This, coupled with USD weakness, means improving market conditions seems to be the trend heading into 2023.

Next week is interest decision week for the US, UK, and Eurozone (14th and 15th) and this will dominate traders’ analysis next week. Perhaps of even more importance to the markets will be the speeches by the Central Banks following their decision. With the US highly likely to go with 50bp and the UK and Eurozone highly likely to go with 75bp, the markets are unlikely to move off this alone as it is already priced into the market. However, any indications regarding their policies moving forward could instigate extreme volatility within the currency markets.