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An eye on the New Year

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By Craig Erlam

We’re seeing choppy trade in financial markets on Wednesday in what is always quite thin trade as investors continue the festivities into the new year.

And there’s certainly a strong sense of holiday trade to the markets, with a light news flow combined with lower liquidity creating choppy but ultimately insignificant moves. It very much feels like we’re just drifting into 2023 at which point I expect things will quickly pick up again.

The key trading themes will continue to dominate in early January, most notably how far central banks are willing to push interest rates in order to display their determination to get inflation back to target. Many have already started easing off the brake and we’re seeing plenty of signs of pressures easing, albeit perhaps not as much as policymakers would have liked by now.

Still, the risks now appear very much tilted to the downside as far as hikes are concerned against the backdrop of a very aggressive tightening in a short period of time and with many countries facing recession. Having started too late, central banks are now at risk of tightening too much and therefore overcompensating for a sloppy start with a painful exit.

China key to oil prices

Oil prices are paring recent gains in the middle of the week, slipping more than 2% after recovering strongly over the last few weeks.

The outlook remains highly uncertain for the oil market and recent sanctions by the G7 and countermeasures by the Kremlin do little to change that at the moment. Both will only be tested if crude prices rise to the point that Russian crude is trading uncomfortably close to the $60 cap or should be above, which is not the case right now. So as it is, it’s all theoretical.

China’s success in pivoting away from zero-Covid could be key to all of this, but with trustworthy data on the spread since restrictions were eased hard to come by, we may have to wait to fully understand the implications for the economy and therefore oil demand. ​

Gold holding gains for now

Gold is trading around $1,800, the level it’s largely fluctuated throughout December. Whether it’s a reflection of traders not buying the Fed’s hawkish determination or bulls being unwilling to give up on the recovery rally, it’s continuing to hang on in there, albeit on ever-weakening momentum.

We could see a correction early in the new year in the absence of a dovish shift in the Fed commentary or some favourable economic data.

Bitcoin treading water

Bitcoin has been treading water over the festive period and I’m sure the crypto community will be perfectly happy about that.

It’s not been an easy few months and the next few could prove to be challenging as well. It’s become a matter of damage control for the industry and the hope that the storm has now passed with another not quickly behind it.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.