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• Central banks, especially the Fed, have toned down expectations of rate cuts, it seems at least partly reflecting concerns that the Trump administration will pursue more inflationary policies.
• Economic surprises have generally been to the positive side in the US and the negative side in the euro area, with concerns remaining elevated over the German economy and public finances in several countries, not least France.
• There are indications that consumer spending in Denmark might finally be increasing somewhat, and we also see more rays of light in other Nordic economies.

For anyone hoping for steep interest rate cuts, December’s central bank meetings were a disappointment. First, the ECB cut its policy rates by 25bp as largely expected, although some market participants had bet on a 50bp cut. A week later, the Federal Reserve cut the policy target range by 25bp accompanied by a clearly hawkish message. Apparently, policymakers put a lot of emphasis on the upside inflation risks stemming from the incoming US administration and their planned economic policies. Moreover, as market-based short-term inflation expectations have increased since the US election both in the US and in the euro area, it is clear investors consider the risks global, not only local.

The change in monetary policy outlook led to a repricing in the rate markets. Before the FOMC meeting, markets were pricing in almost three rate cuts by the Fed for 2025. Currently, it expects less than two. Similarly, before the ECB meeting, the central bank was priced to cut rates at least five times in 2025. Now, markets lean towards four cuts only. We think markets overestimate inflation risks, and underestimate risks to growth. The renewed market focus on inflationary risks largely builds on investor speculations around Trump’s future economic policies. But even if campaign promises are held, implementation of e.g. tariffs may not be as easy nor as fast as many expect, or their inflationary impact may not be significant.

Hence, we are still less concerned of a prolonged period of elevated inflation, and more concerned about growth continuing to surprise to the downside. The German economy remains in dire straits, a persistent headwind for euro area. European recovery would also benefit from a pickup in Chinese demand, but that in turn hinges on further fiscal stimulus by local authorities. The US economy remains relatively robust, and surprises have been on the positive side lately, but growth is likely to slow. For one thing, slowing immigration flow is one more negative risk to growth. We keep our call that the ECB will cut rates in every meeting until September, bringing the deposit rate to 1.5%. We revised our Fed call to reflect the hawkish views of the Committee members, and now expect quarterly cuts instead of cuts in every meeting, but we still expect them to land at 3.00% by March 2026.

The reduction in rate cut expectations has eroded stock market optimism lately. In Denmark, Novo Nordisk share price fell sharply as it occurred that its weight-loss pill may not be as effective as previously thought. The US dollar has remained bid and EUR/USD has declined to a two year-low below 1.03 level. While the weaker euro versus the dollar is a reflection of the diverging growth stories, it also compensates the European exporters for a large part for the negative impact from the potential US import tariffs.

As we enter 2025, we expect another eventful and potentially turbulent year. Economies continue to normalise, but growth might disappoint, and geopolitical risks remain. The incoming US administration has signalled they would continue to arm Ukraine, which is positive from Europe’s perspective, but momentum for ceasefire is also building both in Ukraine, and in Middle East. Alternative scenarios could be more upsetting for markets, for example if Israel is allowed to go “all in” after Iranian regime, all while the US support for Ukraine falters.

Full report in PDF.

US ISM Services PMI rose to 54.1 in December, beating expectations of 53.5 and marking a robust rebound from November’s 52.1. The strong performance signals continued resilience in the services sector, which has now expanded in 22 of the past 24 months. The December reading, the third-highest of 2024, suggests solid momentum heading into the new year.

Breaking down the components, business activity and production surged to 58.2, up significantly from 53.7, while new orders ticked higher from 53.7 to 54.2. Employment showed marginal softness, edging down from 51.5 to 51.4. The standout figure was in prices, which jumped sharply from 58.2 to 64.4, raising fresh concerns over inflationary pressures in the sector.

The overall services reading suggests a positive contribution to the economy, aligning with projected 1.7% annualized GDP growth rate.

Full US ISM services release here.

Daily Pivots: (S1) 1.0312; (P) 1.0374; (R1) 1.0453; More...

Intraday bias in EUR/USD stays neutral at this point, and more consolidations could be seen above 1.0223. But further decline remains in favor as long as 1.0457 resistance holds. Firm break of 1.0223 will resume the fall from 1.1213. However, sustained break of 1.0457 will confirm short term bottoming, and turn bias to the upside for 55 D EMA (now at 1.0562).

In the bigger picture, fall from 1.1274 (2023 high) should either be the second leg of the corrective pattern from 0.9534 (2022 low), or another down leg of the long term down trend. In both cases, sustained break of 61.8 retracement of 0.9534 to 1.1274 at 1.0199 will pave the way back to 0.9534. For now, outlook will stay bearish as long as 1.0629 resistance holds, even in case of strong rebound.

Daily Pivots: (S1) 1.2440; (P) 1.2495; (R1) 1.2576; More...

Intraday bias in GBP/USD stays neutral for now, and more consolidations could be seen above 1.2352. But further decline remains in favor as long as 1.2606 resistance holds. Break of 1.2352 will resume the fall from 1.3433 to 1.2256/98 cluster support zone. Nevertheless, considering bullish convergence condition in 4H MACD, firm break of 1.2606 will confirm short term bottoming, and turn bias back to the upside to 55 D EMA (now at 1.2701).

In the bigger picture, price actions from 1.3433 medium term are seen as correcting whole up trend from 1.0351 (2022 low). Deeper decline could be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. But strong support is expected there to bring rebound to extend the corrective pattern. However, firm break of 1.2256 will argue that the trend has reversed and target 61.8% retracement at 1.1528.

Daily Pivots: (S1) 156.61; (P) 157.28; (R1) 158.33; More...

Intraday bias in USD/JPY stays on the upside at this point. Current rally from 139.57 is in progress to 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25. Firm break there will target 161.94 high. However, break of 156.01 support will indicate short term topping, likely with bearish divergence condition. Intraday bias will then be back on the downside for 55 D EMA (now at 153.64) instead.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Canada’s merchandise trade balance tallied a $323 million deficit in November, registering in the red ink for the ninth consecutive month. October's deficit was revised lower to $544 million.

Merchandise exports gained some steam in November, rising by 2.2% month-on-month (m/m). All but two of 11 sectors registered increases on the month. Higher prices drove crude oil exports up by 4.8% on the month, while consumer goods exports rose for a second consecutive month (+4.4% m/m). Pharmaceutical goods exports (+11.9% m/m) also provided a hefty assist to the headline number.

Meanwhile, total merchandise imports also nudged higher for a second consecutive month, up by 1.8% m/m in November, with the biggest gains coming from consumer goods (+3.8% m/m), basic and industrial chemical, plastics and rubbers (+4.3% m/m), and industrial machinery (3.0%).

In volume terms, merchandise exports rose by 0.5% m/m and imports were up by 0.8% m/m.

Canada's merchandise trade surplus with the United States widened to $8.2 billion in November from $6.6 billion the month prior.

Key Implications

With two months of Q4 trade data in the cards, it looks like trade will be a slight tailwind to Q4 GDP growth. Statistics Canada is still undergoing a major trade-related, data collection transition—so take these figures with a grain of salt.

The outlook for Canadian trade in 2025 is cloudy at best. Incoming president Trump takes office in a couple of weeks and is still threatening a 25% tariff on all Canadian exports. Our base case is that Canada largely avoids a full-scale implementation of Trump's tariff plan, given our energy-heavy relationship with the U.S.—though we acknowledge that any tariff levied against Canada has negative consequences for economic growth. There may be signs that manufacturers and retailers are front-running potential tariffs, as total import and export volumes have risen over the last couple of months.

The yen is trading quietly on Tuesday. Early in the North American session, USD/JPY is trading at 157.68, up 0.07% on the day. Earlier in the day, USD/JPY rose as high as 158.41, its highest level since July.

The Bank of Japan has been moving slowly towards normalization of its monetary policy, which began last March with the lifting of interest rates out of negative territory. The BoJ raised rates again in July but they remain very low at just 0.25%. On Monday, BoJ Governor said that the central bank would raise interest rates if “economic and price conditions continue to improve” but didn’t provide a timeline. The BoJ could raise rates at the Jan. 23-24 meeting but might decide to wait until March or even later, depending on inflation and wage growth.

BoJ policymakers are watching with increasing dismay as the yen continues to lose ground and is trading at six-month lows against the US dollar. Japan’s finance minister Katsunobu Kato warned that the government was alarmed by the yen’s fall and was prepared to take action. The government intervened last July, when the yen fell to 160 to the dollar, and the yen is closing in on that level. Tokyo has showed that it is willing to step into the currency markets but the interventions haven’t proven effective in stemming the yen’s slide. Over the past 12 months, the yen has plunged 10.3% against the dollar.

The US releases ISM Services PMI for December later today. Over the past two years, the PMI has pointed to expansion in services every month but two, pointing to prolonged growth in business activity. The PMI is expected to improve to 53.0, following 52.1 in November. The 50 level separates contraction from expansion.

USD/JPY Technical

• USD/JPY tested resistance at 158.33 earlier. Above, there is resistance at 159.00
• There is support at 156.61 and 155.56

The dollar index remains in red for the third consecutive day, after a mild easing from a two-year top accelerated on Monday, following a media reports said that proposed tariffs by Donald Trump may be less aggressive than initially thought.

Although Trump denied the report, the dollar came under fresh pressure after a brief recovery on Monday.

Bears probe again below 107.83 (Fibo 38.2% of 105.37/109.35 bull-leg and eye pivotal support at 107.36 (50% retracement, reinforced by daily Kijun-sen).

The pullback so far looks like a minor correction of larger uptrend from 99.84 (2024 low, posted on Sep 27), indicators on daily chart show more space for deeper pullback, which should be still seen as a healthy correction, before larger bulls regain control.

Daily Kijun-sen should ideally contain, though deeper dips cannot be ruled out, as markets are positioning for Trump’s era, which will be characterized by stronger economic growth and elevated inflation that would likely keep the monetary policy tight and continue to underpin the dollar.

Extended correction should find firm ground at 106.23/105.70 (daily Ichimoku cloud top / Fibo 38.2% of entire rally from 99.84 to 109.35) to keep broader bulls in play and offer better buying opportunities for fresh attempts at psychological 110 barrier.

Res: 108.43; 108.81; 109.35; 110.00.
Sup: 107.36; 107.10; 106.70; 106.23.

Daily Pivots: (S1) 0.9001; (P) 0.9053; (R1) 0.9097; More…

USD/CHF bounces slightly after drawing support from 55 4H EMA, but stays below 0.9136 resistance. Intraday bias remains neutral for more consolidations. But further rally is expected as long as 0.8956 resistance turned support holds. Above 0.9136 will resume the rally from 0.8374 to 0.9223 key resistance next. However, firm break of 0.8956 will turn bias back to the downside for 55 D EMA (now at 0.8869).

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes. However, decisive break of 0.9223 will be an important sign of bullish trend reversal.

Swiss Franc weakened across the board today after inflation data revealed a reversal in annual CPI back 0.6% in December. This marks the fourth consecutive month of deflationary pressure, as monthly CPI continues to slide. With inflation well below 1% for the past four months, concerns over a return to deflation have grown, intensifying expectations for further monetary easing by SNB in 2025.

Following the release, the probability of a 25-basis-point cut by SNB in March rose to 98.4% from 91% previously. Speculation is also building around the possibility of a 50-basis-point cut, similar to December’s move, which would bring the policy rate to 0.00%. Even more notably, discussions are emerging about the return of negative interest rates this year, as a tool for managing deflationary pressures.

Euro, on the other hand, is supported by another month of acceleration in headline CPI, while consumer inflation expectations also jumped. Its still early to argue that inflation expectations have deviated too much from ECB's 2% target, and thus, policy easing should still carry on. Yet, the pace would remain measured and gradual, as many policymakers have expressed their preference for.

On the broader currency market, Swiss Franc emerged as the weakest performer, followed by the Yen and Dollar. The greenback struggled amid persistent ambiguity surrounding the incoming Trump administration’s tariff policy, with speculation oscillating between blanket tariffs and sector-specific measures. Meanwhile, commodity-linked currencies showed strength, led by New Zealand Dollar and Australian Dollar, as risk sentiment improved. British Pound also posted gains, while Canadian Dollar and Euro held steady in mid-range performance.

Technically, EUR/CHF's corrective rally from 0.9204 looks ready to resume through 0.9440. Yet, strong resistance is expected from 38.2% retracement of 0.9928 to 0.9204 at 0.9481 to limit upside.

However, if USD/CHF could break through 0.9223 resistance with conviction, that would be a sign of bullish reversal in the pair, and a signal of more pronounced selloff in Swiss Franc.

Accelerated rally in USD/CHF could be accompanied by similar move in EUR/CHF through mentioned 0.9481 fibonacci level.

In Europe, at the time of writing, FTSE is down -0.23%. DAX is up 0.61%. CAC is up 0.74%. UK 10-year yield is up 0.0313 at 4.640. Germany 10-year yield is up 0.004 at 2.452. Earlier in Asia, Nikkei rose 1.97%. Hong Kong HSI fell -1.22%. China Shanghai SSE rose 0.71%. Singapore Strait Times rose 0.17%. Japan 10-year JGB yield fell -0.0004 to 1.129.

Canada's merchandise trade deficit narrows to CAD -544m in Nov

Canada's merchandise trade deficit narrowed in November, shrinking to CAD -323 million from October’s revised CAD -544 million, outperforming market expectations of a CAD -800 million shortfall. This improvement was driven by a 2.2% mom rise in exports, complemented by a 1.8% mom increase in imports.

Exports saw gains across nine of the 11 product categories, with higher prices partially contributing to the increase. Adjusted for inflation, real export volumes still advanced by 0.5% mom.

Canadian Dollar’s depreciation against the US Dollar over October and November played a notable role in boosting the relative value of cross-border trade.

Over the two months, Canadian exports grew 3.9%, while imports increased 2.2%. In US Dollar terms, however, exports rose by just 0.8%, and imports declined by 1.0%.

Eurozone CPI rises to 2.4% yoy, core unchanged at 2.7% yoy again

Eurozone inflation accelerated again in December, with headline CPI rising to 2.4% yoy, up from November’s 2.2% yoy, as per the flash estimate. That's also the third month rise in inflation since hitting 1.8% yoy back in September.

Meanwhile, core CPI, which excludes volatile components such as energy, food, alcohol, and tobacco, remained steady at 2.7% yoy for the fourth straight months. Both readings , aligned with forecasts.

Breaking down the components of inflation, services led the way with an annual rate of 4.0%, up slightly from November’s 3.9%. This was followed by food, alcohol, and tobacco, which held steady at 2.7%. Non-energy industrial goods inflation softened marginally to 0.5% from 0.6%, while energy prices rebounded modestly to 0.1% from a sharp -2.0% contraction in the prior month.

ECB survey shows inflation expectations rise, growth outlook deteriorates

ECB's Consumer Expectations Survey for November 2024 revealed that inflation expectations continued their upward drift, with the median forecast for inflation over the next 12 months ticking up to 2.6%, from 2.5% in October. This marks the second consecutive monthly increase. Longer-term inflation expectations for three years ahead also rose to 2.4%, up from October's 2.1%, reaching a level last seen in July 2024.

Despite the uptick in inflation forecasts, uncertainty around short-term inflation expectations held steady at its lowest point since February 2022. This suggests consumers are becoming more confident in their projections, albeit with inflation still running above ECB's 2% target over the medium term.

On the downside, economic growth expectations took a sharper negative turn, with households predicting a contraction of -1.3% over the next 12 months, compared to the -1.1% forecast in October. This worsening outlook reflects persistent concerns about the Eurozone's economic health amid weak demand and geopolitical risks.

Labor market sentiment also deteriorated, as expectations for unemployment rate 12 months ahead climbed to 10.6%, reversing October's slight improvement to 10.4%.

Swiss CPI falls back to 0.6% yoy in Dec

Swiss CPI fell -0.1% mom in December, matched expectations. Core CPI (excluding fresh and seasonal products, energy and fuel) was unchanged for the month. Domestic products prices rose 0.1% mom while imported products prices fell -0.5% mom.

Comparing with the same month a year ago, headline CPI slowed from 0.7% yoy to 0.6% yoy, matched expectations. Core CPI slowed from 0.9% yoy to 0.7% yoy. Domestic products prices slowed from 1.7% yoy to 1.5% yoy. Imported products prices ticked up from -2.3% yoy to -2.2% yoy.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.9001; (P) 0.9053; (R1) 0.9097; More…

USD/CHF bounces slightly after drawing support from 55 4H EMA, but stays below 0.9136 resistance. Intraday bias remains neutral for more consolidations. But further rally is expected as long as 0.8956 resistance turned support holds. Above 0.9136 will resume the rally from 0.8374 to 0.9223 key resistance next. However, firm break of 0.8956 will turn bias back to the downside for 55 D EMA (now at 0.8869).

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes. However, decisive break of 0.9223 will be an important sign of bullish trend reversal.