The European Central Bank policymakers face a dilemma when they meet this week. Do they continue to argue that Eurozone inflation will come down in due course, as doves like Chief Economist Philip Lane believe, or do they decide that it will last longer than previously expected, as argued by the outgoing German hawk Jens Weidmann?
However, with new staff projections likely to point to lower economic growth than previously expected because of the spread of the Omicron coronavirus variant, the ECB could either increase its older Asset Purchase Program (APP). That might well result in a weaker Euro as it would essentially push a decision on when to tighten monetary policy, and by how much, further into the future.
USD/JPY was subdued on Friday, for the most part sticking within recent ranges and not deviating too far from the 113.50 area, which, alongside the 50-day moving average (currently at 113.60), has acted as something of a magnet to the price action these last few days. On the day, the pair is flat just under 113.50, having seen some choppiness after the release of US inflation data which confirmed the headline rate of CPI rising to a four-decade high at 6.8%, though judging by the market reaction, many had been expecting higher.
The pair is on course to end the week around 0.6% higher and, indeed, Omicron uncertainty that had weighed on the pair and pushed back from recent peaks above 115.00 has faded somewhat this week. Market participants are now more comfortable knowing the new variant is milder than delta and 2.
Analysts at MUFG Bank, favor a scenario with further weakens for the pound relative to the US dollar. They see GBP/USD could fall below 1.3000 for the first time in a year. They warn a surprise decision to hike rates from the Bank of England should trigger a bigger (bullish) GBP reaction especially as shorts have been built up recently.
“We continue to favor further GBP weakness in the near-term especially against the USD, and expect cable to fall below the 1.3000 for the first time in just over a year. The timing of lift off for rate hikes by the BoE and Fed appears to be narrowing considerably if the BoE delays raising rates again while the Fed speeds up tightening plans.”
The AUD/USD pair gained some positive traction during the early North American session and shot a fresh daily high, around the 0.7180 region following the release of US consumer inflation figures.
The headline US CPI rose 0.8% MoM in November as against 0.7% anticipated and the yearly rate accelerated from 6.2% in October to 6.9%, marking the highest level since 1982. Adding to this, core inflation, which excludes food and energy prices, rose 0.5% MoM and 4.9% from a year ago, matching consensus estimates. The data reaffirmed expectations that the Fed would tighten its monetary policy sooner rather than later to contain stubbornly high inflation.
Gold traders are turning their attention to the upcoming Federal Reserve interest rate decision due out Wednesday. While no change to the benchmark rate is expected, the Fed will update its policy statement as well as its summary of economic projections (SEP). It is also expected that the word “transitory” will be removed from the statement, a concession to the sustained uptick seen in prices across the economy.
The 2-year breakeven rate fell slightly through the past week, while the 5 and 10 year rates rose marginally, although they remain well below levels seen in November. This shows the market expects prices to ease in coming years as Central Bank rates increase. Still, the market-based inflation measures remain above the Fed’s target range, with the 2-year rate at 3.23%.
Oil set its biggest weekly gain in more than three months as the worst fears over the new virus strain have receded. West Texas Intermediate futures climbed 8.2% this week. Oil has seen a remarkable turnaround after tumbling into a bear market on November 30, following a multiweek plunge. But concerns persist over the omicron variant, which one study indicates is 4.2 times more transmissible than the delta strain in its early stages.
The board of American Express Company (NYSE:AXP) has announced that it will pay a dividend of US$0.43 per share on the 10th of February. Including this payment, the dividend yield on the stock will be 1.0%, which is a modest boost for shareholders' returns. If it is predictable over a long period, even low dividend yields can be attractive. However, American Express' earnings easily cover the dividend. This means that most of what the business earns is being used to help it grow. Looking forward, earnings per share is forecast to rise by 0.1% over the next year. If the dividend continues on this path, the payout ratio could be 19% by next year, which we think can be pretty sustainable going forward.
The Boeing Company (NYSE:BA) received a lot of attention from a substantial price movement on the NYSE over the last few months, increasing to US$233 at one point, and dropping to the lows of US$188.
Great news for investors, Boeing is still trading at a fairly cheap pric, the intrinsic value for the stock is $286.30, but it is currently trading at US$205 on the share market, meaning that there is still an opportunity to buy now. However, given that Boeing’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.
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