Morning Report
December 19, 2024
“The Federal Reserve’s hawkish language led to 1-2% moves across the G10 as the dollar index lifted to its highest level since 2022. The Bank of England is the main event today for sterling, where sticky inflation should keep rates on hold.”
Sam Cornford – Head of Trading
USD
Despite a 25bp rate cut, the dollar index rocketed to a two-year high yesterday as the Federal Reserve struck a much more cautious tone on further easing next year. The number of cuts expected in 2025 were cut from four to two and the projections revised up inflation and growth expectations, prompting markets to slash the volume of cuts expected for next year in half and sending US yields surging. Powell argued that the labour market risks had subsided compared to previous meetings and that further progress on inflation would be needed to ease further. This puts the US-eurozone rate advantage – and therefore the dollar – on a strong footing into Trump’s inauguration on the 20th January, after which his economic policy announcements are going to become a key input into Fed expectations. Today, the domestic calendar incudes a final GDP print for Q3 and the weekly jobless claims figure ahead of core PCE inflation tomorrow.
GBP
Sterling, meanwhile, is being supported by a hawkish narrative of its own. GBP/EUR has climbed more than 1% this week as the UK data has driven a growing certainty about a rate hold from the Bank of England this afternoon. Ex-bonus wages grew 5.2% in the three months to October and, while slightly lower than expectations, another 5.0% services inflation figure was enough to remind markets why policymakers are looking to a gradual path of easing. The market is now pricing fewer than two cuts next year, compared to nearly five for the ECB. There is no press conference today, so the market cues will come from the vote split, where most expect 8-1 in favour of a hold, and the policy statement and minutes, which should provide a couple of clues on how quickly the Bank expects to proceed.
EUR
EUR/USD broke into the 1.03s for the first time since late November as the dollar extended its yield advantage last night. With the data calendar this month almost done and dusted, it is hard to see where the euro could realistically find the ammunition to stage a recovery until next year. Central bank decisions in Norway and Sweden will be key for NOK and SEK this morning, though, with the Riksbank already cutting by 25bps as expected and the Norges Bank set to hold rates steady once again.
Markets
The Fed’s hawkish cut shot down any hopes for a US Santa rally. The S&P 500 dropped 3.0%, the Nasdaq slumped by 3.6%, and the Dow Jones notched its tenth consecutive daily loss – the worst record since 1974.
Main Economic Events (All Times CET)
6:00am: Bank of Japan Rate Decision
9:30am: Riksbank Rate Decision
10:00am: Norges Bank Rate Decision
1:00pm: Bank of England Rate Decision
2:30pm: US Jobless Claims
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