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• At today's monetary policy meeting the BoE kept the Bank Rate unchanged at 4.75%, which was widely expected.
• The BoE delivered a dovish vote split but 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 thereafter.
• The market reaction was modest with Gilt yields tracking slightly lower and EUR/GBP moving higher.

As expected, the Bank of England (BoE) decided to keep the Bank Rate unchanged at 4.75% today. The vote split had a dovish twist with 6 members voting for an unchanged decision and Dhingra, Ramsden and newcomer Taylor voting for a 25bp cut.

The BoE retained much of its previous guidance noting that "a gradual approach to removing policy restraint remains appropriate" and that "monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further". The MPC now judges that the labour market is "broadly in balance" and has similarly revised its expectation for Q4 growth down from 0.3% q/q to no growth as a reflection of the latest weakening in growth indicators. We also note that in the unchanged camp of the MPC, one member considered that a more "activist strategy" could be warranted, hinting at a more dovish shift in the centrist camp.

Given the recent topside surprises to wage and inflation data combined with an expansionary fiscal stance, we think a continuation of a gradual cutting cycle is warranted. We therefore adjust our call, expecting quarterly cuts in 2025 at the meetings associated with updated economic projections. We expect the next 25bp cut in February with the Bank Rate ending the year at 3.75% (prev. 3.25%). We maintain our terminal rate forecast unchanged at 2.75% but expect it to be reached by Q4 2026 (prev. Q2 2026). However, we highlight that the risk is skewed towards a swifter cutting cycle in the first half of 2025, as highlighted by the MPCs communication today.

Rates. Gilt yields moved lower across the board on the dovish vote split but overall, the reaction was muted. Markets price 18bp worth of cuts for February and 55bp by YE 2025. We highlight the potential for BoE to deliver more easing in 2025 than currently priced, expecting a cut in February and a total of 100bp worth of easing in 2025.

FX. EUR/GBP moved higher on the announcement with the dovish vote split taking centre stage. The still cautious guidance delivered today highlights the more gradual approach of the BoE compared to European peers. We think this supports our case of a continued move lower in EUR/GBP. This is further amplified by relative UK economic outperformance and tight credit spreads. The key risk is a soft BoE.

Markets

Yesterday’s hawkish FOMC cut still resonated today. The front end of the curve outperformed slightly after US money markets even outhawked the Fed, looking to only 1 instead 2 rate cuts next year. The US 2-yr yield returns 4.5 bps of yesterday’s 15 bps gain. Long-end US bond yields remain upwardly oriented with the 10-yr and 30-yr yields respectively rising by 3.8 bps (10-yr) to 5.8 bps (30-yr). US president-elect Trump wants to kill a compromise reached between Democrats and Republicans for a three-month stopgap funding extension. Without a deal, the US faces a partial government shutdown by Saturday. He wants to slimdown the package and attach an increase to the debt ceiling (expires in June) to it. NBC even reported that he would support abolishing the debt ceiling altogether. In absence of European numbers, European bonds reacted to the move in US Treasuries yesterday. German yields rise by 4.5 bps (2-yr) to 7.2 bps (10-yr).

The Bank of England kept its policy rate unchanged at 4.75% in a 6-3 majority vote. Three members voted in favour of a 25 bps rate cut (Dhingra, Ramsden and Taylor). We add that one member of the current majority is close to flipping to a more activist approach. Minutes showed him/her arguing that the evolution and prospects for disaggregated measures of activity and inflation could warrant such behavior. Since the previous meeting, inflation rose slightly more than expected (2.6% Y/Y in November), owing in large part to stronger inflation in core goods and food, and is expected to continue to rise slightly in the near term. Bank staff expect GDP growth to have been weaker at the end of the year than projected in November while the labour market is broadly in balance. The outlook is surrounded by more and more domestic (eg impact Autumn budget) and international (geopolitics) uncertainty. A gradual approach to removing monetary policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The market reaction suggests that the split within the board was bigger than expected and that UK money markets took it too far in pricing out 2025 policy rate cuts. UK gilt yields gave away all of the post-FOMC gains with daily changes currently ranging between -2.3 bp (2-yr) and +6.1 bps (30-yr). EUR/GBP bounces off the YtD low at 0.8222 to currently change hands around 0.8260.

News & Views

The Swedish central bank lowered the policy rates by 25 bps to 2.5%. If the economic and inflation outlook holds, it expects to cut rates once again in the first half of 2025. Based on the Riksbank’s own rate forecasts, that would also be the last one of the current cycle: from 2025Q2 on through 2027 it has penciled in a 2.25% policy rate. This is exactly the mid-point of the 1.5-3% neutral rate estimate. After the rapid rate reduction and given the fact that monetary policy works with a lag, the central bank moved to “a more tentative approach when monetary policy is formulated going forward.” Also suggestive of the central bank nearing the end game is the first upward revision to December inflation forecasts since March of this year. The Riksbank expects CPIF to average 1.9%-2%-1.9% over 2024-2025-2026. This compares to 1.7%-1.6%-1.9% in September. The 2027 outcome is seen at 2%. Growth projections were more or less left unchanged at 0.6%-1.8%-2.6%-2.1% over 2025-2027. Swedish swap rates jumped by >10 bps. Gains for the Swedish krone (to EUR/SEK 11.45) could have been bigger if it not were for the risk aversion holding sway on broader financial markets.

The Norwegian central bank stuck to its long-term pledge to keep rates steady at 4.5% through the end of the year. The Norges Bank said that a restrictive monetary policy is still needed but that the time to begin monetary easing is soon approaching, with March 2025 aired as the most likely opportunity to do so. Inflation came in slightly lower than expected, offering some room for rate cuts. That said, it still averages above the 2% target over the policy horizon. GDP would expand at a faster pace next year than expected in September on the back of fiscal policy, consumer spending and higher petroleum investment than previously assumed. One of the key reasons for the Norges Bank to have deviated from major peers by keeping rates steady for so long, was the weak Norwegian currency. It still sees the NOK as a key risk that could derail any rate cutting plans if it were to depreciate further. The NOK loses some marginal ground after today’s decision. EUR/NOK moved to 11.81. Money market expectations were little changed with a first full rate cut priced in by March.

Daily Pivots: (S1) 153.78; (P) 154.32; (R1) 155.38; More...

USD/JPY's break of 156.74 resistance confirms resumption of whole rally from 139.57. Intraday bias stays on the upside for 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 next. On the downside, below 154.91 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.

Daily Pivots: (S1) 0.8946; (P) 0.8983; (R1) 0.9049; More…

Intraday bias in USD/CHF remains on the upside for the moment. Current rally from 0.8374 is in progress for 61.8% projection of 0.8374 to 0.8956 from 0.8735 at 0.9095 next. On the downside, below 0.8916 minor support will turn intraday bias neutral first. But outlook will stays bullish as long as 0.8735 support holds.

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.

Daily Pivots: (S1) 1.0292; (P) 1.0402; (R1) 1.0461; More...

Intraday bias in EUR/USD remains on the downside for 1.0330 support. Firm break there will 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) 1.2513; (P) 1.2621; (R1) 1.2679; More...

Intraday bias in GBP/USD remains on the downside despite some volatility during today. Recovery from 1.2486 should have completed at 1.2810. Retest of 1.2486 should be seen next. Firm break there will resume the fall from 1.3433 and target 1.2298 cluster support zone. Nevertheless, break of 1.2728 minor resistance will turn bias to the upside for 1.2810 and above instead.

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.

Both Sterling and Japanese yen are among the weakest-performing currencies today, following their respective central banks meetings. BoE left rates unchanged at 4.75%, but the surprise came from a dovish shift in the MPC, with three members voting for a cut. While BoE reiterated that a "gradual approach" to easing remains appropriate, rising concerns over economic stagnation suggest the Committee may be ready to expedite rate cuts once the full impact of the Autumn Budget and potential US trade policies becomes clear.

Yen fared even worse after BoJ maintained its policy stance without offering any signals on the timing of future rate hikes. Governor Kazuo Ueda highlighted external risks, particularly stemming from US trade policies, which he described as a significant source of uncertainty for global and Japanese economies. Ueda stressed the need to carefully evaluate the impact of these risks on Japan’s economic outlook before moving on with policy normalizations.

As for the week so far, Dollar remains the runaway leader, supported by Fed’s hawkish guidance, including slower pace of easing in 2025 and the prospect of a higher terminal rate. Despite today’s pullback, Sterling remains the second-strongest performer, while Swiss franc holds third place.

At the weaker end, Yen continues to struggle, weighed down further by rising US Treasury yields. New Zealand dollar is the second worst, pressured by weak GDP data that has fueled speculation of a lower terminal rate in RBNZ’s easing cycle. Australian Dollar follows, with Euro and Canadian Dollar mixed in the middle of the pack.

Technically, CHF/JPY's outlook is cleared alongside many Yen crosses with the strong rally, and firm break of 55 D EMA today. Corrective pattern from 165.28 is still extending with rise from 168.02 as the third leg. Further rally is expected as long as 171.24 support holds. Next target is 177.29 and break there will target 100% projection of 165.28 to 177.29 from 168.02 at 180.03, which is close to 180.05 high.

In Europe, at the time of writing, FTSE is down -1.02%. DAX is down -0.99%. CAC is down -1.14%. UK 10-year yield is up 0.024 at 4.587. Germany 10-year yield is up 0.0580 at 2.305. Earlier in Asia, Nikkei fell -0.69%. Hong Kong HSI fell -0.56%. China Shanghai SSE fell -0.36%. Singapore Strait Times fell -0.44%. Japan 10-year JGB yield rose 0.0194 to 1.086.

US initial jobless claims fall back to 220k

US initial jobless claims fell -22k to 220k in the week ending December 14, below expectation of 240k. Four-week moving average of initial claims rose 1k to 224k.

Continuing claims fell -5k to 1874k in the week ending December 7. Four-week moving average of continuing claims fell -6k to 1880k.

BoE stands pat with dovish 6-3 vote

BoE held its Bank Rate steady at 4.75%, in line with expectations, but the vote leaned more dovish than before. Three MPC members—Swati Dhingra, Dave Ramsden, and Alan Taylor—voted for a rate cut.

BoE reaffirmed that a “gradual approach to removing monetary policy restraint remains appropriate” and emphasized the need to maintain restrictive policy “for sufficiently long” to ensure inflation sustainably returns to 2% target. Decisions on the degree of restrictiveness will be made on a meeting-by-meeting basi.

The statement acknowledged that headline CPI inflation rose to 2.6% in November, slightly above prior expectations, while services inflation remained persistently high. Inflation is expected to rise slightly in the near term.

Meanwhile, indicators of near-term activity have weakened, and staff now expect GDP growth to fall short of projections from the November Monetary Policy Report, although the labor market is seen as broadly balanced.

BoE also flagged uncertainties arising from global inflationary shocks, geopolitical risks, trade policy developments, and measures in the Autumn Budget, all of which could impact growth and inflation.

German Gfk consumer sentiment improves slightly but remains fragile

Germany’s GfK Consumer Sentiment Index for January rose to -21.3, improving from December’s -23.1.

December’s subindices reflected mixed dynamics: economic expectations moved into positive territory at 0.3, up from -3.6, and income expectations increased to 1.4 from -3.5. Willingness to buy also ticked higher to -5.4 from -6.0, while willingness to save fell sharply to 5.9 from 11.9.

According to Rolf Bürkl, consumer expert at NIM, the improvement comes after a steep decline the prior month, partially reversing earlier losses. However, Bürkl noted that at -21.3 points, consumer sentiment remains at a very low level, highlighting a trend of "stagnation since mid-2024."

He warned that a sustained recovery is "not yet in sight" due to persistent challenges. High food and energy prices, alongside growing concerns about job security in key sectors, continue to weigh heavily on sentiment.

BoJ stand pat, highlights wage and global risks

BoJ kept its uncollateralized overnight call rate unchanged at 0.25%, as widely anticipated, with an 8-1 vote in favor. Naoki Tamura dissented, advocating for a rate increase to 0.50%.

Governor Kazuo Ueda, speaking at the post-meeting press conference, reiterated that rate hikes would proceed cautiously. He noted, "If the economy and prices move in line with our forecast, we will continue to raise our policy rate," but emphasized the need to carefully assess data before adjusting the level of monetary support.

The gradual pace of tightening, he explained, is due to the "moderate" rise in underlying inflation, which lacks the strength to warrant aggressive moves.

Ueda highlighted the importance of monitoring wage dynamics, particularly in the context of next year’s wage negotiations, to gauge the strength of Japan’s wage-inflation cycle.

He also pointed to uncertainties in the global economic outlook and the impacts of policy decisions under the incoming U.S. administration, despite the overall resilience of the US economy.

New Zealand's GDP contracts -1% qoq in Q3, broad economic weakness

New Zealand’s economy contracted by -1.0% qoq in Q3, significantly worse than market expectations of -0.2%. The previous quarter’s GDP figure was also revised down sharply, from -0.2% to -1.1%, painting a grimmer picture of the country’s economic performance.

The decline was broad-based, with activity falling in 11 out of 16 industries, including significant contractions in manufacturing, business services, and construction. While primary industries posted gains, both goods-producing and service industries experienced declines.

On a per capita basis, GDP dropped -1.2% qoq, marking the eighth consecutive quarterly decline. The expenditure measure of GDP also contracted by -0.8% qoq. Notably, household consumption expenditure decreased by -0.3% qoq, with reductions in spending on essentials such as grocery food and electricity, highlighting the strain on consumer budgets.

NZ ANZ business confidence falls to 62.3, demand recovery offers glimmers of hope

New Zealand’s ANZ Business Confidence Index fell to 62.3 in December, down from 64.9. However, some subindices showed encouraging signs of recovery. The own activity outlook improved to 50.3 from 48.0, while profit expectations rose significantly to 31.1 from 26.5. Investment intentions also jumped to 21.5 from 18.0, signaling increased business willingness to allocate resources despite a challenging environment.

However, labor market metrics were mixed, with employment intentions slipping slightly from 14.7 to 14.3. At the same time, cost pressures intensified sharply, as cost expectations surged to 70.1 from 62.9, and wage expectations jumped from 75.5 to 79.2. Price intentions remained steady at 42.7, slightly up from 42.2, while inflation expectations ticked higher to 2.63%, up from 2.53%, reflecting ongoing pricing pressures.

ANZ noted that while the survey results indicate signs of recovering demand, they come against the backdrop of this morning’s weak Q3 GDP figures, which showed a sharp contraction. The low bar set by the GDP downturn provides room for optimism if demand continues to improve. However, rising cost and wage pressures could complicate the outlook, especially for inflation management.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2513; (P) 1.2621; (R1) 1.2679; More...

Intraday bias in GBP/USD remains on the downside despite some volatility during today. Recovery from 1.2486 should have completed at 1.2810. Retest of 1.2486 should be seen next. Firm break there will resume the fall from 1.3433 and target 1.2298 cluster support zone. Nevertheless, break of 1.2728 minor resistance will turn bias to the upside for 1.2810 and above instead.

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.

US initial jobless claims fell -22k to 220k in the week ending December 14, below expectation of 240k. Four-week moving average of initial claims rose 1k to 224k.

Continuing claims fell -5k to 1874k in the week ending December 7. Four-week moving average of continuing claims fell -6k to 1880k.

Full US jobless claims release here.

USDJPY spiked to new multi-month high on Thursday, after Bank of Japan kept interest rates unchanged in today’s policy meeting, adding to positive signals for dollar from Fed’s hawkish rate cut on Wednesday.

Although BoJ’s decision did not surprise (markets widely expected unchanged rates at 0.15%) the central bank pointed to cautious approach to the monetary policy in the near future, in light of implications of policies of incoming Trump’s administration and also more careful asses the incoming economic data.

Dovish BoJ and persisting gap between monetary policies of two central banks added pressure on yen and created more favorable conditions for the US dollar.

Fresh bulls cracked former top at 156.74 (Nov 15), signaling an end of corrective phase and likely continuation of an uptrend from 139.57 (2024 low, posted on Sep 16).

Sustained break of 156.74 barrier is needed to confirm signal and open way for further gains, with 157.86 (July 16 high) to come in focus.

On the other hand, daily studies are overbought and warn that fresh bulls may take a breather after strong rally, but the dollar is expected to remain well supported, with limited dips seen as positioning for fresh push higher.

Res: 157.14; 158.00; 158.66; 159.00.
Sup: 155.88; 154.72; 154.43; 153.41.