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The U.S. dollar ends the year on a strong note, hitting two-year highs at 108.45. The Fed expects a 50-point rate cut for the full year 2025 versus 4 cuts one quarter earlier, citing higher inflation forecasts and a stubbornly strong labour market. This fundamental change has given a new impetus to the dollar’s rise that began in late September.

The fundamental reason is the change in the tone of the Fed’s monetary policy. Two consecutive 25-point cuts followed a 50-point cut in the key rate in September. Recent comments suggest a pause in January. The difference between current expectations for the end of next year and what was priced six months ago exceeds 100 points. Meanwhile, the euro, pound, and yen have much more modest six-month changes in expectations. Until September, this difference was against the dollar, but now it is becoming the driving force behind it.

The dollar’s strength is also the result of market speculation, expectations of intensified tariff wars, and fiscal stimulus expected from the Republican Party’s dominance of US politics since November. There has been no actual change yet, but there are signs that the Fed is beginning to incorporate these expectations into its policy.

The dollar index’s technical picture on the long-term charts is on the side of the bulls. Dollar buyers came in on the downturn under the 200-week moving average, turning the market up. In 2022 and 2014, the DXY rallied more than 20% after pushing off that line before consolidating. In 2019-2020, the opposite was the case, with a steady return to the mean culminating in a failure in the second half of 2020.

On the daily timeframes, DXY broke out to new highs after a corrective pullback of a couple of per cent, correcting to 78.6% of the upside from the October lows. A strong reversal to the upside proved the strength of the buyers, and exceeding the last peak confirmed the bullish bias. The next upside target looks to be the 112 area, which will be the exit to the 2022 highs.

In the context of EURUSD, the strengthening of the dollar brings it to the parity area. History suggests that the 1.0 level is unlikely to be a turning point. Either we see attempts to prevent a prolonged decline under 1.05, or buyers will emerge much later.

Market Picture

The crypto market continues to retreat, having lost 4.4% to $3.36 trillion in the last 24 hours and already over 11% from the all-time peak of $3.79 trillion set on Tuesday. While the sell-off in stock markets has slowed, cryptocurrencies are maintaining or even picking up the pace of the decline. This return to early December levels is reminiscent of the rally locking in from November or all the growth of 2024. In the former case, the sell-off could pause in the $3.2 trillion area (-5% from current levels), while in the latter case, the sell-off could pause in the territory below $3 trillion with potential above 12.5%. Despite the threat of a deeper correction, we remain positive on the outlook for the year ahead.

Bitcoin is back below $100K, getting support at $96K on Friday morning. A failure below $94.5K would signal a break of the uptrend of the last six weeks, while a fall below $92K on Friday or below $93K by the end of the week would bring the price under the 50-day moving average. In this case, time is playing on the side of the bears.

News Background

The sharp rise in the ‘network profit’ of new bitcoin investors, coupled with the active distribution of coins by hodlers, suggests a transition into the late stage of the bull market. This is the conclusion reached by Glassnode.

Mining company MARA Holdings purchased 15,574 BTC at an average price of ~$98,529 per coin. The company has grown its bitcoin reserves to 44,394 BTC. Hut 8, another miner, acquired 990 BTC at an average price of $101,710 per coin to total reserves of 10,096 BTC.

The IMF and El Salvador reached an agreement in which the country pledged to mitigate the risks associated with bitcoin in exchange for a $1.4 billion funding package. The IMF has repeatedly criticised El Salvador for its adoption of bitcoin, suggesting that its status as legal tender should be revoked and its reserves should be liquidated.

Total commissions received by Solana applications through November topped $365 million, including $106 million from ‘meme-token factory’ Pump.fun.

BTCUSD – steep pullback from new record high extends into third straight day and accelerated after loss of psychological 100K support.

Completion of Evening Doji Star reversal pattern on daily chart added to downside prospects, prompting stronger profit-taking that pushed the price to 94K zone in European session trading on Friday.

Bitcoin is on track for the first weekly loss in two months, with long upper shadow on large bearish weekly candle, signaling growing offers after larger bulls were strongly rejected on approach to next significant barrier at 110K.

Another potential negative signal will be on failure to register the second consecutive weekly close above 100K and validate signal of sustained break, that may open way for further easing.

Developments on weekly chart, where 14-w momentum is in steep decline from the recent multi-month peaks and RSI is emerging from oversold territory, support the notion.

Extended dips should find firm ground at 90K zone (round-figure / 55DMA) to keep larger bulls in play for fresh push higher, as overall picture is bullish, and supportive fundamentals continue to boost bullish sentiment.

Only firm break below 90K trigger would sideline larger bulls and signal deeper correction.

Res: 95500; 98560; 100000; 101240
Sup: 93000; 92150; 90000; 88685

Daily Pivots: (S1) 1.0333; (P) 1.0378; (R1) 1.0407; More....

Intraday bias in EUR/USD remains on the downside for the moment. Firm break of 1.0330 support will resume the fall from 1.1213 and target 61.8% projection of 1.0936 to 10330 from 1.0629 at 1.0254, and then 100% projection at 1.0023. On the upside, above 1.0452 will turn intraday bias neutral again first.

In the bigger picture, focus stays on 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404. Strong rebound from this level will keep price actions from 1.1273 (2023 high) as a medium term consolidation pattern only. However, sustained break of 1.0404 will raise the chance that whole up trend from 0.9534 has reversed. That would pave the way to 61.8% retracement at 1.0199 first. Firm break there will target 0.9534 low again.

Daily Pivots: (S1) 1.2442; (P) 1.2554; (R1) 1.2614; More...

Intraday bias in GBP/USD stays on the downside at this point. Current decline from 1.3433 should target 61.8% projection of 1.3433 to 1.2486 from 1.2810 at 1.2225. On the upside, above 1.2607 minor resistance will turn intraday bias neutral first. But outlook will stay bearish as long as 1.2810 resistance holds, in case of recovery.

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.

Daily Pivots: (S1) 155.31; (P) 156.56; (R1) 158.68; More...

Intraday bias in USD/JPY is turned neutral with current retreat and breach of 156.39 minor support. Some consolidations would be seen first, but further rally is expected as long as 153.15 support holds. On the upside, above 157.91 will resume the rise from 139.57, and target 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 next.

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.

Daily Pivots: (S1) 0.8951; (P) 0.8990; (R1) 0.9027; More…

Intraday bias in USD/CHF remains neutral for consolidations below 0.9020 temporary top Some more consolidations could be seen but further rally is expected as long as 0.8735 support holds. On the upside, break of 0.9020 will resume the rally from 0.8374. Next target will be 61.8% projection of 0.8374 to 0.8956 from 0.8735 at 0.9095.

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.

Dollar's strong rally paused in early US trading after PCE inflation data came in below expectations, easing concerns that Fed might maintain higher rates for an extended period. Markets are also digesting remarks from Fed officials following the hawkish rate cut earlier in the week.

Most notably, Cleveland Fed President Beth Hammack, the sole dissenter in the rate cut decision, noted that monetary policy is "not far from a neutral stance." She expressed the preference for holding rates steady until there is clearer evidence that inflation is resuming its downward path toward 2%.

Meanwhile, San Francisco Fed President Mary Daly called the rate cut a "close call" and suggested that the policy recalibration phase is "behind us." She's also "very comfortable" with Fed’s median projections for just two rate cuts next year, with a possibility of even fewer.

New York Fed President John Williams struck a balanced tone, stating that the "baseline trajectory is moving down towards neutral rates," but emphasized the importance of being data-dependent. Williams highlighted that Fed has time to assess incoming data and risks, adding, "I think we're in a great place, well positioned" to meet its objectives.

For the week, Dollar remains the strongest performer by a significant margin, followed by the Swiss Franc and British Pound. On the weaker side, New Zealand Dollar is the worst performer, followed by Australian Dollar, while Yen has climbed slightly, now the third weakest. Euro and Canadian Dollar are mixed in the middle.

In Europe, at the time of writing, FTSE is down -0.81%. DAX is down -0.98%. CAC is down -0.94%. UK 10-year yield is down -0.038 at 4.545. Germany 10-year yield is down -0.017 at 2.289. Earlier in Asia, Nikkei fell -0.29%. Hong Kong HSI fell -0.16%. China Shanghai SSE fell -006%. Singapore Strait Times fell -1.14%. Japan 10-year JGB yield fell -0.0311 to 1.055.

US PCE inflation ticks up to 2.4% yoy, core unchanged at 2.8% yoy

US headline PCE price index rose 0.1% mom in November, below expectation of 0.2% mom. Core PCE price index (excluding food and energy) also rose 0.1% mom, below expectation of 0.2% mom. Prices for goods increased less than 0.1% mom and prices for services increased 0.2% mom. Food prices increased 0.2% mom and energy prices also increased 0.2% mom.

From the same month one year ago, headline PCE index ticked up from 2.3% yoy to 2.4% yoy, below expectation of 2.5% yoy. Core PCE was unchanged at 2.8% yoy, below expectation of 2.9% yoy. Prices for goods decreased -0.4% yoy and prices for services increased 3.8% yoy. Food prices increased 1.4% yoy and energy prices decreased -4.0% yoy.

Personal income rose 0.3% mom or USD 71.1B, below expectation of 0.4% mom. Personal spending rose 0.4% mom or USD 81.3B. below expectation of 0.5% mom.

Canada's retail sales rises 0.6% mom in Oct, unchanged in Nov

Canada's retail sales rose 0.6% mom to CAD 67.6B in October, above expectation of 0.4% mom. Sales were up in five of nine subsectors and were led by increases at motor vehicle and parts dealers.

Core retail sales—which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers—were up 0.2% mom.

In volume terms, retail sales were unchanged.

Advance information suggests that sales were relatively unchanged in November.

UK retail sales edge up 0.2% mom, below 0.4% mom expectations

UK retail sales volumes rose by 0.2% mom in November, falling short of expectations for a 0.4% increase. This modest gain partly recovered the -0.7% mom decline recorded in October. Growth in supermarkets and non-food stores provided support, but this was partially offset by weaker performance from clothing retailers.

On an annual basis, sales volumes increased by 0.5% over the year to November. However, volumes remain -1.6% below their pre-pandemic levels from February 2020.

Looking at the broader trend, retail sales volumes rose by 0.3% in the three months to November compared with the prior three-month period. Compared to the same period last year, volumes were up by 1.9%, suggesting some resilience despite ongoing economic uncertainties.

Japan’s core CPI reaccelerates to 2.7%, driven by energy and rice

Japan’s core CPI (excluding food) rose to 2.7% yoy in November, marking the first reacceleration in three months and exceeding market expectations of 2.6% yoy. Core inflation has remained above the BoJ’s 2% target since April 2022, highlighting persistent price pressures. This increase was attributed to reduced government subsidies for utility bills and a sharp rise in rice prices.

Energy prices surged 6.0% yoy, up from October’s 2.3% yoy gain. Within this category, electricity prices jumped 9.9% yoy, and city gas costs climbed 6.4% yoy. Meanwhile, rice prices soared by a staggering 63.6% yoy, the steepest increase since 1971, driven by last year’s unusually hot summer that disrupted production.

Core-core CPI (excluding food and energy) ticked up from 2.3% yoy to 2.4% yoy, while headline CPI rose to 2.9% from October’s 2.3%. Service prices, a key indicator for BOJ as they often reflect wage dynamics, increased 1.5% yoy, unchanged from the prior month.

NZ's exports rises 9.1% yoy in Nov, imports up 3.9% yoy

New Zealand’s trade data for November showed a significant improvement, with goods exports rising 9.1% yoy to NZD 6.5B, while goods imports increased by a more modest 3.9% yoy to NZD 6.9B. The resulting trade deficit of NZD -437m was much smaller than the expected NZD -1951m.

Exports saw notable gains across key markets. Shipments to China increased 6.3% yoy, adding NZD 106m, while exports to Australia climbed 8.4% yoy (NZD 62m) and to the US by 12% yoy (NZD 85m). Exports to the EU surged the most, rising 27% yoy (NZD 74m), with shipments to Japan also showing strength at 7.2% yoy (NZD 19m).

On the import side, data was more mixed. Imports from China edged down -1.7% yoy (NZD -29m) and from the EU fell sharply by -16% yoy (NZD -163m). Similarly, imports from South Korea dropped -12% yoy (NZD -61m ). However, imports from Australia rose 14% yoy (NZD 101m) and from the US increased 7.2% yoy (NZD 41 m).

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.8951; (P) 0.8990; (R1) 0.9027; More…

Intraday bias in USD/CHF remains neutral for consolidations below 0.9020 temporary top Some more consolidations could be seen but further rally is expected as long as 0.8735 support holds. On the upside, break of 0.9020 will resume the rally from 0.8374. Next target will be 61.8% projection of 0.8374 to 0.8956 from 0.8735 at 0.9095.

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.

Markets

A looming US government shutdown starting as soon as tonight is capturing market and media attention. Policymakers had agreed on a bipartisan deal to fund spending through March 24. Enter Trump and Musk. Both urged Republicans to kill the deal, a.o. because it didn’t raise the debt ceiling. Trump otherwise has to address the issue during his own tenure. A bill that did contain such a provision was also shot down a bit later by the Republican-led House as Democrats were opposed and 38 Republicans defected. While we think the economic impact of a government shutdown is contained, it’s an unwelcome layer of uncertainty for the likes of stock markets at the eve of holiday-thinned end-of-year trading. WS already lost up to 3.5% post-Fed and opened another 1% (Nasdaq) lower today. Core bonds gained with UST’s outperforming Bunds. US yields ease between 1.8 and 6.7 bps with the move lower compounded by a slight miss in the November PCE deflators. The headline index picked up by 0.1% m/m to 2.4% from 2.3% vs 2.5% expected. The core gauge missed the bar by a similar margin, adding 0.1% m/m to 2.8%. Adding to the momentum, personal income and spending also printed a sub-consensus 0.3% and 0.4% m/m. Some Fed members came to the fore in the wake of Wednesday’s policy meeting. SF’s Daly said the economy is in a good place and is very comfortable with the projection of two rate cuts next year. She added that the rate decision two days ago was a close call. Vice chair Williams welcomed the “sizeable movement down in inflation over the past two years” but stressed the ongoing need to be data dependent in adjusting policy. He revealed himself as being one of the group that took into account some of Trump’s expected policies on trade and immigration. Cleveland’s Hammack dissented on Wednesday, calling for a status quo. She explained today she preferred to see more progress on prices before cutting again. Rates should stay high enough to modestly restrict activity “for some time”. JPY and CHF outperform against the backdrop of risk aversion. That said, the euro does gain against USD. EUR/USD rises towards 1.04. Sterling erased earlier losses following disappointing retail sales to trade unchanged at 0.828.

News & Views

The Czech National Bank kept its policy rate unchanged at 4% yesterday in a 5-2 vote, pausing the rate cut cycle which started in December of last year. The dovish wing of the board perceives stronger anti-inflationary risks associated with the weaker performance of the global and German economies. The hawkish wing referred to increased inflation momentum in services and faster wage growth. Governor Michl said that rates still remain at restrictive levels and that the board will decide at its next meetings whether to cut them or leave them unchanged. We err on the side of two more 25 bps moves in February and March. Meeting minutes, new inflation numbers (Jan 13), the preliminary Q4 GDP estimate (Jan 31) and CNB communication should provide more clarity from the beginning of next year. EUR/CZK holds withing the trading place between roughly 25 and 25.50 in place since the start of July.

The EC and Switzerland confirmed the completion of negotiations of a broad package of agreements that aim to deepen and expand the EU-Switzerland relationship. It includes an update of five agreements which already give Switzerland access to the EU internal market – air transport, land transport, the free movement of persons, conformity assessment and trade in agricultural products. Each agreement will reflect the evolution of EU legislation in the area concerned and will ensure it is updated dynamically. The agreements will include dispute resolution provisions and State aid disciplines will apply where relevant.

Personal income grew 0.3% month-on-month (m/m) in November, a deceleration relative to October's outsized 0.7% gain. Personal income is 5.3% higher than 12 months ago, well above the pace of inflation.

Accounting for inflation and taxes, real personal disposable income grew 0.2% m/m, slower than the 0.5% pace in the prior month.

Spending remained robust, increasing 0.4% on the month, and was up 5.5% from a year ago.

Stripping out inflation, spending volumes grew 0.3% – an acceleration relative to the 0.1% gain recorded in October. Spending on goods picked up steam (+0.7%), led by higher outlays on vehicles and parts and recreational goods, while spending on services was little changed (+0.1%).

Inflationary pressures eased off in November. The Fed's preferred inflation metric, the core PCE price deflator, rose 0.1% m/m, less than the 0.3% m/m increase seen in October. Year-over-year, core PCE inflation was 2.8% in November, unchanged from the prior month.

With spending outpacing income growth, the personal savings rate edged lower in November, declining to 4.4% down from 4.5% in October.

Key Implications

Consumers kept their purse strings open last month, and it seems that many were on the lookout for new car. This could partially reflect the post-hurricane replacement demand. For the fourth quarter a whole, consumer spending looks to increase by 3%, only a small downshift from 3.5% pace seen in Q3. Looking at the year as whole, U.S. consumers are finishing 2024 in strong financial shape thanks to wealth gains in equity markets and continued job gains. As a result, spending growth outpaced income for much of this year (with October being a notable exception).

Looking ahead to next year, we expect consumer spending to moderate to a trend-like pace of 2% (forecast) as job growth continues to slow, while inflation remains elevated. Strong gains in household wealth represent an upside risk to our outlook as consumers could lean on it next year as job growth moderates.