December 20, 2024

“The final round of central bank decisions this week have ultimately translated into one last bout of dollar strength to cap off 2024. The dollar index is trading at a two-year high, the euro is within an inch of a two-year low, and sterling has plummeted to the lowest since the summer after a dovish vote split at the Bank of England.”

Tim Hallinan – Trading Director

USD

There one last major input today for the dollar in 2024: core PCE inflation. The greenback consolidated gains yesterday as the 10-year Treasury yield climbed above 4.50% for the first time since May, having now risen 100bps since the first cut back in September. The markets are pricing only one full rate cut by June and barely a 50% chance that there is a second by the end of the year. The yen was the biggest loser of the session, losing 1.7% as rallying US yields met a surprisingly dovish Bank of Japan, and prompting familiar verbal warnings about intervention from Japanese authorities. Core PCE – the Fed’s preferred gauge of inflation – is expected at 0.2% m/m and 2.9% y/y this afternoon. The mild monthly figure broadly keeps the Fed on track to cutting rates, but a higher print risks investors chasing the dollar rally higher. We also get speeches from Daly and Williams at the Fed and some consumer sentiment data.

GBP

Sterling sank to a six-month low yesterday and dipped below 1.25 this morning after a dovish hold from the Bank of England. There was far more support for a rate cut within the MPC than most were expecting, with a Dhingra, Ramsden, and Taylor in a minority group that had become increasingly concerned with the softer economic data of late and argued that ‘very restrictive’ rates risk an ‘unduly large’ output gap – i.e. that the economy would run too far below its potential. Meanwhile Bailey was keen to emphasise the fact that the ‘world is too uncertain’ going into next year to be able to give any commitment on the pace of further easing. With Trump, the budget impact, and the path for services inflation to weigh up over the next twelve months, the Bank was keen to remain flexible. Retail sales disappointed slightly this morning with a 0.2% print, although there has been little market impact.

EUR

EUR/USD is trading only a touch above the two-year low that it last hit in November as the post-Fed dollar rally continues to weigh on the euro. The eurozone calendar is nearly done and dusted for the year, but we do get a final consumer confidence figure this afternoon. US core PCE inflation has the biggest potential as a catalyst in terms of data, and then there is a good chance of some volatility over the next week as liquidity thins out.

Markets

The Fed’s hawkish cut continued to drive broad-based losses in the equity markets yesterday as US stocks failed to recover and European markets had the chance to react to the spike in Treasury yields above 4.50%. The EuroStoxx 50 sank 1.6%, the Nasdaq dropped 0.5%, and Germany’s DAX fell 1.3%.

Main Economic Events (All Times CET)

8:00am: UK Retail Sales
2:30pm: US Core PCE Inflation
4:00pm: US UoM Consumer Sentiment
4:00pm: Eurozone Consumer Confidence

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