By: Blake Merriman (Forex Analyst)
Edited by: Francesco Corbellini (Head of Article)
The last week of November comes with many key developments in the Chinese, US and EU markets.
CHINA PROTESTS: JUST COVID?
source: Ansa.it
Firstly, large amounts of frustration from the Chinese people over the government’s Zero - COVID policy has finally manifested itself in some of the largest and most direct protests against Xi Jinping in a decade. This could have a positive impact on the dollar for two reasons: first the incoming lockdowns in China suggest the nation is now lagging far behind the United States when it comes to its COVID recovery, and second the unusual strength of these protests could be indicative of potential deeper problems yet to come in China. Both these situations could cause investors to be cautious around China, at least in the short term, and may therefore lead to a strengthening of the dollar as issues surrounding COVID and Chinese societal unrest could push companies and investors back towards the US.
INFLATION PROBLEMS IN THE U.S.
source: Statista.com
That being said, the US is also facing an uncertain future due to inflationary issues and the surrounding responses to inflation from the Fed. It is becoming clearer that most members of the Fed are backing a slower increase in rates so to be cautious not to over clamp on the US economy and instead wait for better economic data to come through on the most recent rate hikes. A significant portion of the Fed’s strategy could be contingent on the upcoming NFP report next week which, if job creation numbers are too large, could cause the Fed to rethink their conservative approach to raising rates. In a bid to control inflation, currently at 8%, the Fed may be forced to raise rates faster to prevent the economy from overheating on the demand side. Thus, next week, Forex markets involving USD pairings could become volatile after the release of the NFP report as individuals begin to speculate on how the report will impact the size of future rate increases. It is challenging to predict in which direction the dollar will go as contradicting forces could come into play. For example, if the NFP shows a larger than expected increase in jobs, this could indicate that the Fed will raise rates at a faster than expected pace. This may increase hot money flows into the US increasing demand for the dollar but could also reduce the amount of money flowing into the US by other longer term investors reducing demand for the dollar. Thus, it will likely be important to exercise caution when trading USD next Friday.
EUROPEAN OIL PRICE GAPS
source: Forbes.com
Finally, news has come that there will be further delays by the EU for talks on the setting of the oil price cap. This week, there was much confusion in the oil markets caused by the uncertainty of the upcoming price cap alongside the EU embargo on oil coming into effect on the 5th of December. Traders have been struggling to guess how effective the price cap will be since, so far, only the G7 has agreed to implement the cap. Russia has thrown an additional spanner in the works by stating they will not sell oil to any nation operating under the cap. This could mean that key international players such as China and India will refuse to impose the price cap on Russian oil if it is set too low since they are already receiving it at a discounted rate to Brent and will therefore want to avoid alienating Russia. Thus, the EU has a tough decision to make and expectations are that the EU will set a cap at around $65 a barrel above the current market rate of $63 leading many to question the point of the sanction.
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