US GDP beats expectations, German GDP and inflation in focus

The euro continues to drop on Friday morning ahead of German GDP figures and CPI data expected later in the session. The move follows a slump of more than 1% on Thursday afternoon, falling back below parity with the dollar after the markets felt a less hawkish stance from the ECB while the bank raised interest rates by 75 basis points. There was a wide range of reactions to the data released on Wednesday that showed that U.S. gross domestic product rose at an annualized rate of 2.6% last quarter, the end of two straight quarters of declining output that had raised concerns that the economy was in recession. Yesterday, the European Central Bank became the latest central bank to signal they were becoming concerned about how to manage the slowdown in the economy while also tackling inflation.

Euro is down following the ECB meeting

It is relevant to note that after the RBA and the Bank of Canada both raised rates by less than expected earlier this month, the ECB still increased rates by 75 basis points. However, Lagarde seems to have hinted at a pivot without explicitly stating so. Since the central bank did not announce any plans for what may occur in December, or commit to any intentions that might occur during that month.

It was also noted that the ECB was not willing to outline a plan to indicate when quantitative tightening would begin as well. It is apparent from this that the members of the board are in disagreement regarding the overall effect of the current policy on the economy as a whole. The euro subsequently fell below parity as a result of this, after hitting a five-week high earlier in the day.

Japan is on the way to a record inflation

Another key event on Friday was the BoJ meeting, which impacted the yen. Following the announcement that the BoJ would hold interest rates at ultra-low levels as expected, the Japanese yen remained weak at around 146.19. Furthermore, the Japanese central bank raised its inflation forecast for 2022, which indicates that the economy could suffer in the near future.

On Friday, data revealed that inflation in Tokyo hit a 33-year high in October. It is likely that, for December, there will be a similar increase in inflation in the entire country.

A growing gap between the local and foreign interest rates has dented the appeal of the yen in recent years, making it one of the worst-performing Asian currencies of the year, down around 30% for the year.

Although the yen was set to end the week higher as a softer dollar and retreating US Treasury yields contributed to a steady yen.

Events of the day

The US session is packed with highly expected core PCE index and pending home sales data. The PCE, a key inflation gauge watched by the Federal Reserve, is expected to show an additional uplift with a jump to 5.2, from 4.9%. All things considered, this will not change the fact that the Fed is likely to increase rates by 75 basis points next week when they meet. However, it may change the picture regarding what takes place in December. There's a real narrative driving markets right now, and it is not so much about a pause as much as it is about a slowdown in the pace of rate hikes.