Core inflation in the US rose in November to 2.2% versus 2.1% a month earlier, and at first glance this growth strengthens confidence that the Federal Reserve will raise the rate at the meeting on December 19. At the same time, it should be noted that core inflation, which does not take into account energy prices, is still below the peak set 4 months ago, while inflation across the entire spectrum of the market fell from 2.5% to 2.2%.
The slowdown in prices indicates the likelihood of a decline in consumer demand in the near future, and even if the Fed can formally consider the data convincing enough to continue the tightening, the markets may hold a completely different opinion.
This conclusion is pushed by the study of the dynamics of 5-year TIPS bonds, the yield of which is a good indicator of inflation expectations in business. In May, a 5-year maximum yield was reached, indicating business confidence in the further growth of the US economy, but the last two months have been rapidly declining.
As of December 1, the yield of TIPS fell to 1.62%, which is at least 15 months, and the dynamics remains negative. It is obvious that business expects a decline in consumer prices, and there can be only one reason - in anticipation of a decline in consumer demand and worsening forecasts for economic growth.
The steady decline in yields also indicates that investors expect a decrease in the inflation forecast at the Fed meeting on December 19. The deterioration of macroeconomic forecasts will give a signal to the markets that the Fed is approaching the end of the rate growth cycle at levels lower than it signaled at the beginning of the year, which means the dollar markets may be overvalued, which will lead to it being sold.
Import and export price indices will be published today, the forecast is negative. The dollar is facing the threat of a strong corrective decline, which is holding back the overall slowdown of the world economy and the associated flight from risk.
Eurozone
Today, the ECB is expected to officially complete the QE program. While formally this is a hawkish move, it will almost certainly be accompanied by a soft accompanying commentary and a statement about maintaining a flexible policy in the future, thus avoiding a strengthening of the euro after the meeting.
It is also unlikely that the ECB will give any hint on the first rate hike.
Also today, the EU summit will take place, where the main issue will be to discuss possible assistance to Theresa May in her unsuccessful attempts to convince Parliament of the need to approve the agreement, since the implementation of the agreement is in the interests of the EU. Any positive news from the summit can support the euro.
Ahead of the ECB meeting, the EURUSD is trading in a narrow range limited to 1.1325 and 1.1415. Out of range is possible only if the results of the meeting will differ from those expected by the market.
Britain
The RICS housing price index in November fell to -11p, which is the lowest since 2012. For several years, the housing market and the construction sector outpaced other sectors of the economy, since the Bank of England stimulated the economy significantly reduced the rate on mortgage loans. Now there is a reverse process, and it began before the Bank of England returned to the rails of normalization. The reason is the uncertainty on Brexit, which forces both investors and home buyers to curtail activity.
On the eve, Theresa May managed to hold on to the post of prime minister, promising before the vote that she would not run for the next election in May 2022. This victory will add her several points in the confrontation with the Brexit parliament.
Today, GBPUSD is trading in the side range after the previous day's low of 1.2475 and the subsequent correction. Players are waiting for the results of the EU summit, but we must assume that the growth to the recent support of 1.2660 is corrective and selling can resume at any time.
