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Yen, which has been one of the weakest currencies this week, showed a modest recovery during today’s Asian session. The rebound came on the back of stronger-than-expected inflation data and renewed verbal intervention from Japan’s Finance Ministry. November’s inflation figures revealed a sharp reacceleration, driven by significant increases in energy prices and rice prices. Despite this, the slight uptick in core-core CPI was insufficient to push BoJ into immediate action. Expectations remain for a possible rate hike in January, with future moves contingent on developments in domestic wage growth and the trade policies of the incoming US administration.

Japanese Finance Minister Katsunobu Kato reiterated the usual warning against "one-sided or rapid" currency movements, emphasizing that exchange rates should reflect economic fundamentals. He pledged to take "appropriate action" to address excessive volatility. However, these remarks had a limited market impact given the dominance of Dollar, which surged after Fed’s hawkish hold and the strong rally in US Treasury yields. In particular, 10-year yield has broken through 4.5% resistance level, now setting sights on 5.0% mark. This momentum keeps USD/JPY on track toward the critical 160 level.

In weekly rankings, Dollar remains the clear leader, driven by Fed expectations and rising yields. Swiss Franc holds a distant second, followed by the British Pound, which remains relatively resilient against others despite the selloff after BoE rate decision.

Meanwhile, New Zealand Dollar is the week’s worst performer, weighed down by poor GDP data showing significant economic contraction. Yen is the second weakest, pressured by both a lack of BoJ action and strong US and European yields. Australian Dollar rounds out the bottom three, while Euro and Canadian Dollar are positioned in the middle. Though market dynamics on the bottom side of the spectrum could still shift in the final trading sessions.

Technically, it should be emphasized that EUR/USD is still holding above 1.0330 near term support after all the volatility so far. Sellers appear not too committed yet. Because of this, even with a breach of 1.0330, some support could be seen from 61.8% projection of 1.0936 to 10330 from 1.0629 at 1.0254 to contain downside. EUR/USD would need to break through 1.0254 decisively to confirm that Dollar's underlying strength is to sustain.

Looking ahead, US personal income and spending, as well as PCE inflation data are the main focuses for the rest of the day. Canada retail sales will be watched too.

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/JPY Daily Outlook

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

Intraday bias in USD/JPY remains on the upside for now despite current mild retreat. Current rally is part of the whole rise from 139.57, and should target 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 next. On the downside, below 156.39 minor support will turn intraday bias neutral again first. But outlook will stay bullish as long as 153.15 support holds, in case of retreat.

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.

A week packed with central bank decisions is coming to an end with a sour taste in everybody’s mouth. The Federal Reserve (Fed)’s decision to cut rates by 25bp was fully meaningless and the incoming data is a proof. The US Q3 growth was revised to 3.1% from 2.8% printed earlier, the sales growth was revised higher from 3 to 3.3% and core PCE priced – though lower than the quarter before – was also revised slightly higher to 2.20%, raising worries that even the two rate cuts from the Fed next year would be too much. As such, the early gains were given back and the S&P500 and Nasdaq closed in the negative, the Dow Jones was flat while small and mid cap stocks saw no appetite either. Sharing the headlines with Powell, Trump threatens people of his own party to dump a bipartisan deal and risk a government shutdown if they don’t push to raise or suspend the national debt limit under Biden, so he can spend wholeheartedly when he comes to office. The US yield curve is steepening, investors are not willing to buy longer-dated maturities on prospects of higher long-term inflation and ballooning debt. And the US dollar advances toward the strongest levels in more than 2 years leaving other majors under the shadow before Xmas.

The EURUSD failed to stay above the 1.04 mark yesterday and is struggling to hold ground near the 1.0350 level, the Stoxx 600 is racing toward the 500 support, while Cable settles below the 1.25 mark on the back of a dovish no-change that the Bank of England (BoE) delivered at yesterday’s MPC meeting. Three MPC members instead of two (expected by analysts) voted to cut the rates at this week’s meeting. The other six opted for no change – wary of reigniting inflation as the government prepares to increase spending to boost growth, and as Trump threatens the world with eye-watering tariffs. Interestingly, Governor Andrew Bailey – who is clearly not the most popular central banker – had the merit of sounding rational yesterday by saying that the ‘world is too uncertain’ to commit to cut borrowing costs in February. War, Trump, climate change – there’s too much happening for anyone to claim they see the future with clarity. But one good news for the UK is that the United Kingdom is not as concerned as – say the EU, China, Canada and Mexico – by the Trump tariffs and the latter could help the British assets cope with Trump better than their peers. British stocks trade with around 40% valuation discount compared to the MSCI World peers, it has one of the fastest dividend growth among the European and American indices and they returned 10% to their investors these years including reinvested dividends. If inflation U-turns as geopolitical and trade tensions worsen, the FTSE 100 stocks will be in a good position to benefit from these developments.

Elsewhere – and this is amusing – inflation in Japan accelerated in November. The headline figure climbed back to 2.9%, the highest in three months, while core inflation advanced to 2.7%, also a three-month high. Why is this funny? Because just yesterday, the Bank of Japan (BoJ) decided to pass on a rate hike, with officials seemingly too cautious to act amid uncertainties over Trump-era policies and geopolitical tensions. Meanwhile, Japan’s interest rate sits at 0.25%, while inflation is running near 3%. The Japanese have a different relationship with inflation – they don’t despise it as much as we do. After all, decades of deflation, which is far harder to reverse, have shaped their perspective – a lesson the Chinese are now learning the hard way. But the BoJ’s decisions still feel illogical, as they don’t align with a conventional policy framework. Consequently, the USDJPY is giving back some earlier gains on the stronger-than-expected inflation figures and speculation that rising inflation might prompt BoJ action. However, since the BoJ doesn’t really tie interest rates to inflation, the USDJPY has room for further gains, especially as the US dollar continues to strengthen broadly.

In China, the People’s Bank of China (PBoC) kept its policy rates unchanged today – as expected – although the officials are now committed to put in place ‘more proactive fiscal measures’ and ‘moderately loose’ monetary policy. For now, none of these legs have been enough to bring investors back on board. The Chinese CSI 300 is preparing to close the week on a meagre note.

In focus today

In the euro area, we get data on consumer confidence for December. Consumer confidence has been on a rising trend the past two years but in November it unexpectedly declined. It will be very import for the growth outlook to see if the decline was just a blip or it continued in December as we expect private consumption to be the main growth driver in 2025.

From the US, November Private Consumption Expenditures (PCE) are due for release today, including the Fed's preferred measure of inflation. The CPI measure released earlier pointed towards relatively steady inflation pressure in November.

In the US, we will also keep an eye on Congress, which will have to find a deal to avoid a government shutdown, after the House of Representatives voted down the latest version of a funding bill last night.

In the Nordics, we will look out for consumer and business sentiment in Sweden and Denmark.

We also get retail sales, wage data and PPI inflation in Sweden.

Economic and market news

What happened overnight

Japanese November CPI inflation excl. fresh food increased to 2.7% from 2.3% in October. Core inflation increased to 1.7% from 1.6. The underlying price pressure has been stronger in H2 and largely aims with the 2% inflation target. The unwillingness from the BoJ to raise rates further stems from a worry that wage growth will fade in the spring leaving price pressures back where they have been for decades, close to zero. This has added further to downward pressures on the yen triggering verbal intervention from the Japanese finance minister and top currency diplomat.

What happened yesterday

The Riksbank cut the policy rate by 25bp to 2.5% as widely expected but the signals for the future were more hawkish as the Riksbank expects only one more cut during H1 2025. In the rate path, the implied probability is rather evenly distributed between the January and March meetings, but with the overall communication saying they will have "a more tentative approach" and "carefully evaluate the need for future interest rate adjustments" it seems more likely than not that the Riksbank is ready to pause in January, in our view. We therefore have adjusted our call and now expect 25bp cuts in March and June, resulting in an end point of 2.00% (previously 1.75%). At the press conference, Thedéen commented that current policy is likely somewhat stimulative and that once the policy rate reaches 2.25% by Q1 next year, the risks are actually balanced putting an equal probability between cuts and hikes from there. We firmly believe there are more downside risks to the Riksbank's main scenario. See more in Riksbank - December 2024: 25bp cut but a hawkish signal. We now expect two cuts in March and June to 2.0% (previously 1.75%), 19 December.

Also in Sweden, there are plenty of interesting data. We start off with retail sales data for November, and here we will hopefully see more signs of the long-awaited recovery for household consumption. We also get wage data for October and PPI data for November, where the latter will likely see a rise due to higher energy prices (all released at 8.00 CET). At 9.00 CET, we will get a new set of NIER confidence data, and here we also expect to see a continued improvement in sentiment among both households and manufacturing sector. As always, attention will also be on price expectations and hiring plans. NIER will also release new set of economic forecasts at 9.15 CET.

Norges Bank left policy rates unchanged in a decision widely expected by analysts and markets. Importantly the Norwegian central bank firmed its guidance towards a March 2025 rate cut - the first in the cycle - by presenting a rate path suggesting a close to 100% probability of a 25bp rate reduction conditioned on the central bank's economic projections materialising. Norges Bank notably did not suggest that rates could be cut in January. Further out Norges Bank guided towards three cuts in 2025 although with an elevated risk of a fourth cut. We continue to pencil in the first cut in March alongside three additional rate cuts in 2025 and four cuts in 2026.

The Bank of England also agreed to keep rates unchanged as expected. The decision was taken with three board members voting for a cut, which was a surprise. That said, BoE continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace after that.

FI: European curves steepened from the long end mirroring the US yields' reaction to the FOMC meeting on Wednesday night. However, it was a gradual move through the day, thus it was with some delay that we saw the full effect. With the final central bank meetings of the year behind us, and only a few trading sessions left for the year, we expect a relative tight trading range in coming days, with focus on the supply announcements for next year. Yesterday, the French Tresór said that they plan to sell EUR300bn next year, which is unchanged from the October plan. BoE's dovish tilt (6-3 split vote for unchanged) relative to market expectations sent UK yields somewhat lower on the day, see our BoE flash comment here Bank of England Review - BoE to lag peers in 2025; we stay positive GBP, 19 December.

FX: As expected, the Riksbank lowered the policy rate by 25bp to 2.50% and indicated only one more cut in H1. A hawkish cut which strengthened the SEK and supported our call for tactical downside in EUR/SEK. EUR/SEK dropped some ten figures towards the lower end of 11.40's before erasing some of the losses in the Asian session. Meanwhile, NOK/SEK was down 1.5 figures to below 0.9650. Norges Bank did not rock the boat, but the NOK traded on the defensive as focus shifts to the looming easing cycle that will probably start in March. The selloff in EUR/USD paused in the European session but as US trading opened the cross dived below 1.04 again and is now back close to 1.0350. The relentless selling of the JPY has continued, and USD/JPY was on the verge to break above 158. This morning Japan FM Kato expressed concerns and talked about appropriate action if there are excessive moves. Sterling was lower after Bank of England's dovish voting split to keep rates unchanged.

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.

Full UK retail sales release here.

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.

Full Japan CPI release here.

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).

Full NZ trade balance release here.

Key insights from the week that was.

As is tradition in Australia, the Federal Government delivered its mid-year economic and fiscal outlook in the lead up to Christmas. As anticipated, this update highlighted a troubling combination of fading revenue windfalls and persistent strength in spending across critical services, infrastructure, cost-of-living measures and state/local grants. While 2024-25 saw a modest improvement in the budget position, future budget deficits and off-budget spending from 2025-26 through 2027-28 were revised up. Current circumstances and the outlook are consistent with a ‘two-speed’ economy, where the public sector drives growth as private demand remains weak, household spending and business investment continuing to be buffeted by tight policy and cost-of-living pressures.

The impetus for further strong growth in public demand is waning, however; and with headwinds for private sector demand only slowly abating, there is a risk of a ‘shaky handover’ of the growth baton from the government to the private sector. This theme is at the heart of our growth forecasts for 2025 and beyond, explored in detail at the national and state level in our latest Coast-to-Coast report.

Focusing on the consumer, the latest evidence from the Westpac-MI Consumer Sentiment survey continues to underscore a marked improvement in confidence through the second half of 2024. During October and November, consumer sentiment staged a rapid recovery from recession-era levels. While December saw a modest pull-back in the headline index (-2.0%), confidence in current conditions improved, particularly with respect to family finances versus a year ago (+6.9%) and whether now is a ‘good time to buy a major household item’ (4.8%). With the stage 3 tax cuts implemented and cost-of-living pressures slowly receding, a foundation for a pick-up in household consumption in Q4 and 2025 is forming, though only time will tell how strong it is.

Turning to New Zealand, the annual revisions to GDP were largely as anticipated, growth revised up through 2022 and 2023 such that, at March 2024, the economy was 2.3% larger than previously estimated. Unexpectedly though, Q2’s contraction was revised down from -0.2% to -1.1% and Q3 saw a further contraction of 1.0% against expectations for a 0.4% fall. In Q3, the decline in activity was spread across numerous sectors, the squeeze on consumers and businesses from the fight against inflation of particular note. However, some of the weakness stems from temporary factors too. Looking ahead, recovery is expected from Q4, Westpac’s GDP nowcast having moved into positive territory since October. Interest rate relief is providing a benefit, and there is more to come, our New Zealand team now expecting a low for this cycle of 3.25% after a 50bp cut in February and a 25bp reduction in April and May. This week also saw the release of the New Zealand Government’s half-year outlook. Much weaker than expected, the fiscal outlook also highlights the need for accommodative monetary policy.

Further afield, it was a strong finish to a big year thanks to three major central bank meetings.

The FOMC delivered another 25bp fed funds rate cut in December as expected, bringing cumulative easing since September to 100bps. That said, the tone of the statement was non-committal on the policy outlook, and the projections slowed the expected pace of easing. September’s 3.4% fed funds forecast for end-2025 is now not seen until end-2026. The FOMC continue to hold a favourable view of growth and the labour market and so, given persistence in inflation through 2024 and nascent risks related to the imposition of tariffs, are keen to bide their time with policy.

That said, it is evident from their forecasts that downside risks for growth are considered as material as those to the upside for inflation. We also believe it is important to keep a close watch on the risks. However, we anticipate downside activity risks are more probable in 2025 and upside risks for inflation from 2026. This leads us to hold an expectation of four cuts in 2025 against the FOMC’s two, but then two hikes in 2026 when they expect continued policy easing. We expect the inflation risks of 2026 to show persistence too, likely justifying a 10-year yield around 4.80% (along with growing fiscal uncertainty).

The Bank of Japan was the next cab off the rank, holding the policy rate at 0.25%, in line with our expectations. The statement indicated that accommodative policy alongside wages growth has supported inflation and above-potential GDP growth. The BoJ will continue monitoring whether businesses persist with robust wage increases and if that feeds through to prices. Union confederation RENGO has indicated they are aiming to negotiate a 5.0% increase in wages for FY25, with a focus on lifting wages amongst small businesses. This, alongside movements in the exchange rate were considered “more likely to affect prices”. Now that businesses feel more comfortable raising prices, future shocks to import prices, in part due to movements in the currency, are more likely to see consumer prices lift as well. A future move in policy will be predicated on whether RENGO can successfully negotiate a third consecutive strong wage increase and if higher import costs, possibly due to Trump’s policies, prompt businesses to raise prices. Evidence for this will be available in early March 2025, and the next rate increase should occur swiftly thereafter at the March 2025 policy meeting. The BoJ is likely to start winding back hawkish rhetoric after that and assess domestic and global conditions over an extended period before deciding if any further change in the policy stance is warranted.

Finally, the Bank of England met overnight and decided to keep the bank rate steady at 4.75% albeit with a bit of dissent – three out of six members voted to reduce it by 25bp. The labour market was considered ‘in balance’ but uncertainties remain around the outlook, partly a result of poor-quality data. While there has been progress on inflation since the start of the year, allowing the MPC to ease rates, concerns about inflation’s persistence are rising. More causes for uncertainty around disinflation were outlined, not limited to the expansionary measures announced in the Autumn budget and geopolitical tensions. These risks led most of the Committee to agree on a ‘gradual approach to reducing monetary policy’. From here, the Committee will want further evidence that the disinflationary pulse remains intact and that will come from signs that demand has eased to meet the constrained supply capacity. We expect the BoE will cut once per quarter in 2025 and end at a neutral rate of 3.50% by March 2026.

Key Highlights

• USD/JPY started a fresh surge above the 154.00 resistance.
• A key bullish trend line is forming with support at 154.50 on the 4-hour chart.
• EUR/USD tumbled toward 1.0350 before correcting some losses.
• AUD/USD and NZD/USD accelerated losses.

USD/JPY Technical Analysis

The US Dollar formed a base above 152.00 against the Japanese Yen. USD/JPY started a fresh surge above the 153.20 and 154.00 levels.

Looking at the 4-hour chart, the pair gained strength above the 154.20 resistance, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). It even cleared the 76.4% Fib retracement level of the downward move from the 155.88 swing high to the 148.79 low.

The bulls pushed the pair to a new monthly high above 156.50. On the upside, the pair could face resistance near the 157.40 level. The next major resistance is near the 158.00 level.

A close above the 158.00 level could set the tone for another increase. The next major resistance could be the 159.20 level, above which the price could climb higher toward the 160.00 resistance.

On the downside, immediate support sits near the 155.80 level. The next key support sits near the 155.00 level. Any more losses could send the pair toward the 154.50 level. There is also a key bullish trend line forming with support at 154.50 on the same chart.

Looking at EUR/USD, the pair declined heavily below the 1.0420 support zone before the bulls appeared near the 1.0350 zone.

Upcoming Economic Events:

US Personal Income for Nov 2024 (MoM) - Forecast +0.4%, versus +0.6% previous.
US Core Personal Consumption Expenditure for Nov 2024 (MoM) - Forecast +0.2%, versus +0.3% previous.

• EURGBP reversed from support zone
• Likely to rise to resistance level 0.8300

EURGBP currency pair recently reversed up from the support zone located between the key support level 0.8225 (which stopped the previous minor impulse wave i) and the lower daily Bollinger Band.

The upward reversal from this from the support zone is likely to form the daily Japanese candlesticks reversal pattern Bullish Engulfing – of the pair closes today near the current levels.

Given the bullish divergence on the daily Stochastic, EURGBP currency pair can be expected to rise to the next resistance level 0.8300.

• EURJPY broke resistance zone
• Likely to rise to resistance level 165.00

EURJPY currency pair recently broke the resistance zone located between the key resistance level 162.00 (which stopped the previous minor wave 2) and the 50% Fibonacci correction of the downward impulse 1 from October.

The breakout of this resistance zone accelerated added to the bullish pressure on this currency pair.

EURJPY currency pair can be expected to rise further to the next resistance level 165.00 (which reversed the price multiple times in November).