FX Markets Monthly Outlook – December 2018

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The month of November was dominated mostly by Europe as the EU, and the UK leaders agreed to a Brexit deal that could potentially enable the UK a smooth transition in March 2019. As a result, the British pound was seen experiencing some wild swings.

In the U.S., the equity markets continue to come under pressure as both the benchmark indexes, the Dow Jones and the S&P500 were seen erasing the gains. On the political front, the mid-term elections saw the Democrats regaining control of the U.S. House while the Republicans managed to hold on to their majority in the Senate.

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The cracks in the Congress add to investor concerns on the ease of pushing ahead with policy changes. The U.S. dollar no doubt came under pressure, but the greenback managed to hold its dominance across the board.

Crude oil also dominated the newswires last month. Oil prices plunged into bearish territory surprising most of the crude oil bulls. Price of the WTI Crude oil settled at $50.93.

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November 2018 – FX Market Performance

The month ahead: December 2018

The month of December is expected to relatively quiet for most of the global economies. The focus will shift to the monetary policy guidance from the Fed and the ECB.

Brexit is also likely to remain in the headlines as the UK mulls over the Brexit deal while the deadline for March 2019 looms closer.

Here’s a quick overview of some of the critical line up of events for the month ahead.

Fed rate hike – but what comes next?

The U.S. Federal Reserve will be heading into its final monetary policy meeting of the year. Speculation is rife that the central bank will be hiking the fed funds rate one more time by a quarter basis point at this month’s meeting.

This would bring the U.S. short-term interest rates to 2.50% – 2.25% and will mark four rate hikes for the year. However, investors who will be already looking ahead will be watching the Fed’s forecast and the staff economic projections that will be released at this month’s meeting.

Following the Fed’s Powell’s speech last week that the U.S. interest rates were near neutral rates, the markets are assigning a probability of just two rate hikes for the year ahead. This comes amid a possible late short-term cyclical slowdown in the U.S. economy.

To make matters a bit more uncertain, the U.S. administration’s tariff ban on China will also come into effect from January which would potentially impact the global trade dynamics. The recent downtick in inflation is another concern for investors.

As a result, the December Fed monetary policy decision will no doubt be a high stakes game as the Fed will set the tone for interest rates next year.

ECB to end its QE purchases

The European Central Bank’s meeting will be another closely watched event this month. As the central bank previously announced, it would be completing its bond-purchase program at the turn of the year.

This comes amid renewed concerns of a broader economic slowdown in the Eurozone. Falling oil prices last month further add to the uncertainty. While the Eurozone’s headline inflation has been sitting near the ECB’s inflation target rate of 2.0%, core inflation speaks another story.

With falling fuel prices and a slowdown in the economy, the ECB will be treading on cautious ground. Officials, however, are hopeful that the downturn is only temporary, attributing the declines due to the emission standards that hit the German automobile sector.

However, if the downturn in the economy is more widespread, investors will be watching how the European Central Bank will react to this.

The ECB will also be releasing its monetary policy framework for the year ahead. The year 2019 will be further interesting for investors as Mario Draghi’s tenure as the ECB President will end in October 2019. This could also potentially mark a shift in the ECB’s monetary policy guidance.

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