Dollar to weaken in 2019
Next year will see global deceleration and decline of the USD. To weaken the current strength of the greenback, there will be two critical inputs: the US Federal Reserve Bank will hike rates this week and again in 2019; the European Central Bank will shift bias further towards normalization. Markets are seeing evidence of both, but the Brexit chaos is clouding the picture. Should the UK-EU relationship improve, watch for an overvalued USD to quickly fall.
US inflation was soft in November, because of lower energy prices that fell by 4.1% in a month. Non-energy components showed steady rises as food prices and core CPI both rose by 0.2% monthly. Consumers are still spending, as highlighted by solid retail numbers, but households’ decision to buy used cars and to rent housing rather than buy suggests uncertainty. The broad economy is running white hot, which indicates inflation pressure and three 0.25% hikes in 2019. The Fed is likely to head toward normalization. Wednesday’s press conference offers Fed Chairman Powell a chance to clarify views on market volatility and further rate moves.
Markets higher ahead of China announcements
Asian shares rose on Monday ahead of the US Federal Reserve Bank and Bank of England monetary policy meetings and China’s Central Economic Work Conference, where 2019 growth targets and policy goals will be mentioned. The Chinese government last week said it will support economic growth with reforms and risk reduction while reinforcing investment, jobs and trade. Japanese Nikkei 225 closed the day at +0.62%, while Chinese markets closed slightly lower, with the Hong Kong Hang Seng -0.03% and CSI 300 -0.15%.
Globally, stocks tumbled on Friday following poor economic data from China and Europe. And the trend is expected to continue today, as investors watch Eurozone inflation, expected to have slowed in November by 0.20% monthly, while the trade balance is expected to have risen slightly to EUR 14 billion. Business sentiment is declining and a dovish statement from the European Central Bank has pushed the euro lower (EUR/USD -5.70% year-to-date). EUR/USD is trading at 1.1330, expected to bounce back following last week’s ECB meeting, bouncing from 1.1306 (14 December low) and heading along 1.1340. We expect a sharp drop following the Fed’s meeting from Wednesday, which is expected to raise rates by 0.25%.
