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Currently the market are overpriced for fed interest rate tightening. This week the Federal Reserve will deliver another 25bp hike. This week we expect the Fed message to become more dovish narrowing the divergence between dots and OIS. 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 end hking cycle 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.