US dollar sell-off pauses amid fears of continued Federal Reserve rate hikes tipping the US economy into a...

Market Bias: Mixed

• The Fed hiked interest rates by the expected 0.50% to 4.25% - 4.50%, the seventh consecutive rate hike. The Fed projects a terminal rate of 5.1% in 2023. Fed Chair Powell, in a hawkish tone, committed to keep raising interest rates to see a sustained reduction in inflation down to the committee's 2% target level.
• US annualized inflation as of November came in at 7.1%, core inflation at 6%, continuing a downward trend from the peak set during the summer.
• Retail sales for November declined 0.6%, much worse than the market anticipated - a 0.1% fall.
• The US Purchasing Managers’ Indexes fell significantly below expectations, with the composite falling to 44.6 in December from 46.4 in the previous month, signaling a deepening economic contraction in the US.
• Risk to current market bias: Sustained drop in inflation and risks shift from inflation to economic contraction could shift the Fed to a looser policy path, however, a deep economic contraction could drive dollar strength.

Market Bias: Mixed

• Bank of England (BoE) voted 6-3 to raise interest rates by 0.50% to 3.5%, during its December meeting, the highest level in 14 years. The Central Bank will continue to assess data in future rate decisions but projects a current peak in Consumer Price Index inflation.
• Retail sales dropped by 0.4% month-over-month in November.
• Consumer confidence rose slightly to -42 but still hovers near the record low of -49 reached in September. High inflation and a prolonged recession continue to weigh on consumer sentiment.
• UK annualized inflation as of November came in a touch softer at 10.7% from 11.1% in the previous month, consensus was at 10.9%.
• Risk to current market bias: A softening Fed interest rate policy path is supportive of the pound, however, the risk of recession in the UK could also put a pause on the BoE rate hikes.

Market Bias: Mixed

• The European Central Bank (ECB) raised is policy rate by 0.50% to 2% and announced plans to reduce its balance sheet by allowing maturing principal holdings under the Asset Purchase Program to roll off starting in March. The more hawkish tone and policy is supportive for the currency and in the absence of other factors should provide a ramp for the currency to continue to strengthen.
• October industrial production fell 2% vs. an expected drop of 1.5% from September. Annually industrial production has slowed to 3.4% in October from 5.1% in September.
• S&P Global Manufacturing and Services PMI stabilized in December but both readings still show an economic contraction, however at a moderated pace. Manufacturing PMI came in at 47.8 while Services PMI came in at 49.1.
• Eurozone annualized inflation as of November moderated slightly to 10.1% from 10.6% in the prior month.
• Risk to current market bias: An overall hawkish ECB stance and softening Fed interest rate policy path is supportive of the euro, however, the risk of recession in the Eurozone could also put a pause on the ECB rate hikes.

Market Bias: Mixed

• Bank of Canada Governor Tiff Macklem’s year-end speech indicated the bank’s primary concern is not raising rates fast enough to control inflation versus the resulting risk of economic recession. The hawkish remarks sent the Canadian dollar lower by about 1%.
• Housing starts drifted slightly lower, down 0.2% to 264,159 units in November.
• Risk to current market bias:  As the Bank of Canada slows the pace of its interest rate tightening the Canadian dollar strength will be increasingly impacted by the Fed’s interest rate policy.

JPY (Japanese yen)

Market Bias: Bearish

• The Jibun Bank Manufacturing Purchasing Managers Index dropped to 48.8 in December compared with 49 from the month prior, while the Services Purchasing Managers Index rose to 51.7 from 50.3. The services industries continue to benefit from a boost in tourism.
• Trade deficits in Japan continue to surge, with November recorded at JPY 2,027 billion from JPY 973.6 billion a year ago, marking the 16^th consecutive deficit month.
• Japan’s core machine order got a boost from strong corporate capital spending coming in at 5.4% month-over-month compared with expectations for a 2.6% gain, however, machine orders are still well below order levels from a year ago at 0.4% compared to 2.9%
• Risk to current market bias: A softening Fed interest rate policy path and decreasing import prices reducing trade deficits for Japan could strengthen the currency.

CHN/CNY (Chinese yuan)

Market Bias: Mixed

• China’s November industrial production year-over-year grew at 2.2% compared to 5% in the year prior. This is less than the market anticipated at 3.6% and the weakest growth since May.
• The November unemployment rate is hovering at 5.7% from 5.5% in the previous month.
• China’s November retail sales year-over-year dropped 5.9%, much steeper than the prior month’s drop of 0.5%, while the market expectations were for a 3.7% drop.
• Risk to current market bias: Pivot away from the restrictive COVID prevention measures could increase infections to a vulnerable population further stifling economic growth hurting the yuan while a softening Fed interest rate policy path could strengthen the currency.