As we near the end of a year that’s seen significant developments on both economic and geo-political fronts, we have one more ‘big’ week of data remaining for markets. Next week brings a series of potential driversthat could provoke volatility into year-end, with the highlight being the Federal Reserve meeting on Wednesday of next week.

Below, we look at three of the high points for global markets as we move into next week, along with relevant areas that traders will likely want to be watching around each event.

Tuesday brings British Inflation

In the month of November there was one currency that stood-out as being even stronger than the U.S. Dollar, and that was the British Pound. After the ‘sharp repricing’ in the value of the Sterling around the Brexit referendum and then the subsequent dovish-campaign from the Bank of England, the prospect of rising inflationary forces began to creep-in. At the bank’s Super Thursday batch of announcements in November, we finally heard some element of acknowledgement of those inflationary forces as the bank adjusted forward-looking inflation expectations-higher, and this gave the appearance that the bank may not be as dovish as previously-thought or transmitted.

On Tuesday, we get British inflation numbers and this will put some data behind this theme. Of course, we will likely see considerable attention around this focused upon the major pair of GBP/USD. But for traders looking at long-term bullish stances in the British Pound, GBP/JPY may be a more attractive option, as this could put the trader in a position where they can go long Sterling without having to trade against the 13-year highs in the Greenback as we move into Fed week.

Cable set a fresh high earlier in the week with a test of the 1.2750 psychological level. After failing to break above this level of resistance, the pair has spent the latter portion of this week working on a retracement. A prior level of resistance around the 1.2500-handle could be an attractive area to look for that next ‘higher-low’ level of support.

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Chart prepared by James Stanley

And if looking to avoid short-USD exposure, GBP/JPY could offer such an option; and while Cable is approximately 200 pips above the election night lows, GBP/JPY is up approximately 1800 pips from that same election night low; highlighting the additional Yen-weakness that’s been getting priced-in along with the return of the ‘reflation trade’.

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Chart prepared by James Stanley

Wednesday brings the Fed

With the return of that aforementioned ‘reflation trade’ is also the prospect of longer-term rate normalization out of the Federal Reserve. This is likely the ammunition behind the recent U.S. Dollar breakout as the currency has continued to trade at fresh 13-year highs. Earlier this week, we saw a support test around prior resistance; but yesterday’s out-sized move in the Euro brought that strength in DXY and the U.S. Dollar right back to the table.

If the Fed signals that more than two rate hikes are being expected for next year, this Dollar trend can certainly continue to strengthen-higher into the end of the year. But the Fed is likely going to try to refrain from going ‘too hawkish,’ as a similar such scenario last year seemed to contribute to the market collapse that kicked off 2016.

So balance with a slight-bias towards hawkishness would seem to be the goal for the Federal Reserve at Wednesday’s meeting.

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Chart prepared by James Stanley

BOE Rate Decision on Thursday

There is scant expectation for any movement on rates here. And for the next batch of inflation projections, which will likely be the most pertinent driver for GBP in the near-term, we have to wait until February. So the most relevant takeaway from this rate decision will likely be Mr. Mark Carney’s comments on how the bank might look to handle ‘inflation overshoots’ in the future. This is relevant because it’s signaling how aggressively the Bank might look to hike rates should inflationary pressure continue to increase.

Should Tuesday’s data come out significantly strong, the importance of Mr. Carney’s opinion on ‘inflation overshoots’ will likely garner even more focus from markets.

An interesting area to watch here will likely be in EUR/GBP, where even with yesterday’s exuberant move of bearishness in the Euro the pair was unable to move down to a new low. Should the BOE take on a dovish approach towards inflation overshoots, as they’ve done in the past, this could bring some weakness in GBP to find another test of resistance in EUR/GBP, and this can open the door to longer-term bearish stances.

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