December 18, 2024

“To cap off 2024, today is the beginning of a packed series of rate decisions from the Federal Reserve, the Bank of Japan, the Bank of England, the Riksbank, and the Norges Bank. Markets will be looking for any guidance that helps to clear up the path for interest rates in 2025.”

Tim Hallinan – Trading Director

USD

The dollar remains strong as markets head into a busy 24 hours of central bank meetings starting this evening, with decisions from the US, Japan, Norway, Sweden, and the UK. The US data was relatively mixed yesterday – retail sales impressed at 0.7% while industrial production contracted by -0.1% in November – and the market is still 95% certain of a rate cut from the Federal Reserve tonight. There are three main things the consensus is looking for: a) the federal funds rate to drop to 4.25-4.50%, b) a downward revision to the number of 2025 rate cuts pencilled in on the dot plot, in line with market pricing, and c) some hawkish guidance that suggests a pause will be on the table in January. A lack of recent progress in the CPI, the expectation that Trump’s economic policy will stoke inflation further, and the continued strength of the US economy have all convinced investors that the Fed will have little scope to ease rates in the coming months. A big move in the dollar needs either a dovish tilt to Powell’s communication or some surprises in the economic projections.

GBP

UK inflation accelerated to an 8-month high of 2.6% as expected this morning, keeping the Bank of England on a gradual rate cutting path. Core inflation rose to 3.5% and services inflation held at 5.0% and, although both were 0.1ppt below expectations, the data does a good job of reminding us why the Bank of England is set to hold rates steady tomorrow. Yesterday’s sticky 5.2% wage growth figure saw markets slash expectations for rate cuts next year to just two. That is perhaps a vulnerability for sterling given how stretched this repricing has been – some downside surprises next year could see it unravel.

EUR

Yesterday’s survey data was mixed for the euro, which has fluctuated around the 1.05 mark for most of the week so far. The eurozone ZEW figure was surprisingly upbeat, rosing from 12.5 to 17.0, while the German ifo survey dropped more than expected to 84.7. We get a speech from ECB’s Lane and a final CPI report this morning, but EUR/USD is more likely to be guided by this evening’s Fed decision. Elsewhere in Europe, consensus is looking for a rate cut from the Riksbank and yet another hold from the Norges Bank early tomorrow morning.

Markets

A modest risk-off mood took stocks lower across the board yesterday as markets anticipated the final round of major central bank decisions this year. The UK’s FTSE 100 took a 0.8% hit, presumably on the back of the hawkish repricing for the BoE after some stronger-than-expected wage growth data. Japanese auto stocks rose as Nissan and Honda entered talks to consolidate.

Main Economic Events (All Times CET)

8:00am: UK CPI Inflation
8:00pm: Federal Reserve Rate Decision

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