Forex platform trading reminder: the dollar continues to fall, the average is close to the bearish arrangement, pay attention to the US PPI data and consumer confidence index

At the beginning of the Asian market on Friday (December 9), the US dollar index fluctuated narrowly and is currently trading around 104.85; on Thursday, the US dollar index fell by 0.37% and fell to the 5-day moving average, causing the exchange rate to fall below all moving averages. The moving average is close to the short line. As expectations that the Federal Reserve will slow down the pace of interest rate hikes continue to weigh on the dollar, investors need to beware of further downside risks to the dollar. Next week will usher in US inflation data in November and the Federal Reserve's interest rate decision. The market is relatively cautious as investors need to weigh the Federal Reserve's policy outlook and the possibility of a recession caused by rising interest rates.

The US Federal Reserve, the European Central Bank and the Bank of England are all due to announce interest rate decisions next week as policymakers continue to cool growth by raising rates to rein in stubbornly high inflation.

Traders and investors will be watching closely for any sign that the Federal Reserve is ready to pause interest rate hikes.

The euro closed up 0.5% against the dollar at 1.0554 on Thursday, while the pound rose 0.2% against the dollar; the dollar was essentially flat against the yen.

Investors are still waiting for Friday's U.S. November producer price data (PPI) and preliminary U.S. December University of Michigan consumer confidence index, while monthly U.S. consumer inflation data will be released next week, the day before the Federal Reserve's December 14 policy meeting. Inflation data could be crucial in establishing long-term expectations for monetary policy.

Bipan Rai, head of North American FX strategy at CIBC Capital Markets in Toronto, said the economic reports "remain a priority for now. Beyond that, everything depends on what the Fed talks and does at its next meeting."

According to Refinitiv data, the dollar index is still up about 9.5% so far this year, but it fell more than 6% in the fourth quarter, potentially recording its biggest quarterly decline since the third quarter of 2010, when it fell 8.5%.

Karl Schamotta, chief market strategist at Corpay in Toronto, said: "Inflation risks are receding and the Fed's policy path is becoming more predictable, while energy prices are falling, geopolitical tensions are receding and China is starting to reopen, so investors are moving money from the US to other undervalued markets. But if inflation unexpectedly picks up and the Fed's rhetoric is more hawkish than expected, all of that could come to a screeching halt next week, but for now the music is playing and investors have to get out of their chairs."

Most traders expect the Fed to raise interest rates by 50 basis points next week.

Brent crude fell below $80 a barrel for the first time since Russia invaded Ukraine in late February, amid growing concerns about how much a slowing economy will hit global energy demand.

As energy prices have fallen, market-based inflation expectations have also eased. The 10-year break-even rate in the United States is currently only 2.27%, after peaking at more than 3% in April.

These two forces, combined with waning expectations that the Federal Reserve will continue to raise interest rates at an equally aggressive pace, contributed to the dollar's weakness this quarter.

The market's willingness to take risks has picked up, boosting commodity currencies. The Australian dollar rose 0.68% against the US dollar on Thursday to close at 0.6769; the New Zealand dollar rose 0.38% against the US dollar on Thursday to close at 0.6377.

Key economic data and events on Friday

institutional perspective

FlossbachvonStorch: ECB has no reason to slow down interest rate hikes now, it is expected to raise interest rates by 75 basis points next week

Thomas Mayer, founder of the FlossbachvonStorch Institute, said in a note that the ECB was so far behind the inflation curve that the bank "has no reason to slow down the pace of rate hikes now". He expects the ECB to raise rates by 75 basis points next week, which is above market pricing of about 50 basis points, according to Refinitiv. Mayer believes that the current deposit rate of 1.50% needs to rise at least above the core inflation rate. In November last year, the core inflation rate in the euro zone was 5%. Mayer said: "Since core inflation is likely not to decline in the foreseeable future, the forecast ECB policy rate must reach at least 5%.

Deutsche Bank's DWS: Although the pace of interest rate hikes is expected to slow, the Federal Reserve is unlikely to turn dovish

Christian Scherrmann, an economist at DWS, Deutsche Bank's asset management arm, said in a note that the Fed was expected to raise interest rates by a modest 50 basis points at its December 13-14 meeting, but that this should not be seen as a shift to a more dovish policy stance. "Inflation remains too high, the labour market is too strong, and supply and demand are too unbalanced for the Fed to let its guard down," he said. Scherrmann said the Fed's latest forecasts would likely reflect a slowdown, but would also reflect its willingness to accept low economic growth and high interest rates in 2023. "The Fed's dot plot would likely show rates peaking at just over 5 per cent, while growth could be cut below 0.5 per cent next year."

Wells Fargo: The FOMC is expected to raise the federal funds rate to a peak of 5.00% to 5.25% in March 2023.

Reuters poll: Bank of England's end point interest rate expectations will be the focus of next week

Market expectations for the Bank of England's end point interest rate range from 3.5% to 4.75%, according to a Reuters poll published on Thursday. Sterling could move further if there is still a big difference in expectations that the Bank of England rate could peak after next week's BoE rate decision. Money markets currently show that UK bank rates will be 4.5% by May 2023 and have a 50% chance of reaching 4.75% by August 2023. Sterling could benefit if the BoE takes a hard line and raises rates to 4.75% or higher next year. However, this could hurt the pound by increasing the risk of a deep recession in the UK. Most Reuters poll respondents currently expect the UK recession to be long and mild.

Legal & General: The dollar may weaken further in 2023, emerging market currencies will be the biggest beneficiaries

Sonja Laud, chief investment officer at asset manager Legal & General (LGIM), said the dollar should "weaken further" in 2023 after strengthening in 2022, although the outlook remains uncertain and will depend on the actions of the Federal Reserve and inflation. "For now, we are neutral," Laud said. "However, the dollar should weaken further after this year's rally driven by safe-haven flows and the Fed's aggressive rate hike cycle." Laud also said a weaker dollar would likely boost emerging market currencies more than sterling or the euro. Since emerging market countries' debt is dominated by dollars, these currencies typically benefit from a sideways or falling dollar.