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When (core) markets barely move the way they do today it’s because there’s little news or important events are looming. It’s both in this case. An empty economic calendar and the Fed policy meeting tonight resulted in technical and directionless trading in FI and FX markets. US yields swapped tiny gains of 1.5 bps for losses of 2 bps the moment first US investors joined the arena. German bunds marginally underperform Treasuries, rising up to 2.8 bps at the very long end of the curve. We did have UK inflation numbers for November featuring the agenda but they came too close to expectations to leave a mark. Headline inflation picked up to 2.6% as anticipated but core (3.5%) and services (5%) price pressures missed the mark by 0.1% ppt. The slight downside miss is not enough to offset sharper-than-expected wage growth in yesterday’s labour market report. If anything, UK money markets price in less rate cuts after this morning’s CPI outcome. Markets barely price in a cumulative 50 bps for 2025 - after tomorrow’s widely anticipated status quo. Gilts underperform peers for a second day. Yields add between 1.4 and 3.4 bps across the curve. Sterling quickly erased negligible kneejerk losses to trade unchanged around EUR/GBP 0.825. EUR/USD isn’t going anywhere either (+/- 1.05). The rest of the G10 FX landscape shows daily changes of less than 0.5%.

Jumping to tonight’s Fed decision now. A rate cut from 4.5-4.75% to 4.25-4.5% is all but certain. Markets have more or less fully discounted such a scenario since the lack of an upward CPI surprise last week. After three consecutive rate cuts (50-25-25) we expect the Fed to steer the market to a pause in January. Chair Powell last month referring the strong economy said there’s no hurry in lowering the policy rates. It also offers the Fed a moment to get a sense of president-elect Trump’s policy goals when entering the office on January 20. The updated dot plot will show fewer rate cuts for 2025 with three reductions instead of the current four the most plausible scenario. We think that the long-term estimate, a proxy for the neutral rate, will have shifted further north from 2.875% to 3%. It was already a close call in September. Since US money markets price in only 50 bps of cuts in 2025, we may see a kneejerk downleg in US (front-end) yields and the dollar after the dot plot release. It won’t stretch very far though if Powell strikes a generally hawkish tone in the presser afterwards by keeping the onus on the solid state of the economy. That should offer solid support to both yields and the dollar, the latter especially against an ongoing ailing euro. First meaningful support in EUR/USD is at 1.0335 (November correction low).

News & Views

The Confederation of British Industry (CBI) reported falling volumes in the final quarter of the year as growth expectations weakened further. The CBI’s quarterly Industrial Trends Survey showed manufacturing output volumes falling at the fastest pace since mid-2020 with manufacturers expecting another steep drop in Q1 2025. Total orders were the weakest since late 2020. Against a backdrop of weak demand, manufacturers’ stocks of finished goods remain relatively high at levels seen during the early stages of the Covid pandemic. CBI’s lead economist warned that “Manufacturers are facing a perfect storm of weakening external demand on the one hand, amid political instability in some key European markets and uncertainty over US trade policy. And on the other hand, domestic business confidence has collapsed in the wake of the Budget, which has increased costs and led to widespread reports of project cancellations and falling orders.” Meanwhile, expectations for selling price inflation picked up noticeably and is forecast to comfortably stick above the long-run average.

Polish consumer confidence improved slightly more than expected in December, from -17.1 to -16.7 (vs 17 consensus). Apart from last month, it’s still the weakest number of this year. Details showed biggest improvements in the current possibility of making important purchases and in the current economic situation of the country. The only decrease came on account of the evaluation of the current financial situation of households. The Polish zloty was unmoved by the numbers, sticking to the YTD highs around EUR/PLN 4.25. Tomorrow’s November wage and employment figures have more market moving potential.

Daily Pivots: (S1) 1.0469; (P) 1.0501; (R1) 1.0524; More...

No change in EUR/USD's outlook as sideway trading continues in tight range. Intraday bias stays neutral at this point. Corrective pattern from 1.0330 might extend further. But outlook will stay bearish as long as 55 D EMA (now at 1.0668) holds. On the downside, below 1.0452 will bring retest of 1.0330 low.

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) 1.2676; (P) 1.2703; (R1) 1.2739; More...

Sideway trading continues in GBP/USD and intraday bias stays neutral. On the downside, break of 1.2615 minor support will indicate that corrective recovery from 1.2486 has completed. Retest of this low should be seen next, and break will target 1.2298 cluster support zone. Nevertheless, break of 1.2810 will turn bias to upside for stronger rebound.

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) 152.99; (P) 153.66; (R1) 154.17; More...

USD/JPY is staying in consolidations below 154.47 temporary top and intraday bias remains neutral. Further rally is expected as long as 151.79 minor support holds. Above 154.47 temporary top will target a retest on 156.74 high first. Firm break there will resume whole rally from 139.57, and target 61.8% projection of 139.57 to 156.74 from 148.64 at 159.25 next. However, break of 151.79 will turn bias back to the downside for 148.64 support 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.

Daily Pivots: (S1) 0.8903; (P) 0.8939; (R1) 0.8963; More…

Intraday bias in USD/CHF remains neutral as consolidations continue below 0.8974 temporary top. While deeper pullback cannot be ruled out, outlook stay bullish as long as 0.8735 support holds. Break of 0.8974 will resume larger rise from 0.8374 to 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.

The forex and stock markets are holding steady today, with limited volatility as traders anticipate FOMC rate decision and updated economic projections. A 25bps rate cut, reducing the target range to 4.25–4.50%, is virtually certain. However, the market’s focus lies on the tone and guidance Fed delivers. Critical questions include whether a pause in easing could be on the table for January, the expected pace of rate cuts throughout 2025, and the revision of the neutral rate, which could indicate where Fed sees the terminal rate of the current cycle.

Tomorrow, attention will turn to BOJ and BoE, both expected to hold rates steady. For BoJ, markets are watching for any signs that further rate hikes could be planned for early 2025, particularly in January, amid ongoing efforts to manage inflation and normalize policy. Meanwhile, BoE's MPC voting split will be a key focus. Traders will look to the statement for policymakers’ views on recent data surprises and how the Autumn Budget is shaping their outlook, especially as inflation remains persistent in key sectors like services.

Technically, some attention could be in S&P 500's reaction to FOMC today. Recent up trend stalled after hitting 61.8% projection of 4103.78 to 5669.67 from 5119.26 at 6086.98. Selloff today could set up deeper correction to 55 D EMA (now at 5911.81) before resuming the up trend. On the other hand, clearing of 6086.98 will pave the way towards 100% projections at 6685.15 in early part of next year.

In Europe, at the time of writing, FTSE is up 0.21%. DAX is up 0.14%. CAC is up 0.26%. UK 10-year yield is up 0.0246 at 4.550. Germany 10-year yield is up 0.0118 at 2.245. Earlier in Asia, Nikkei fell -0.72%. Hong Kong HSI rose 0.83%. China Shanghai SSE rose 0.62%. Singapore Strait Times fell -0.53%. Japan 10-year JGB yield is down -09.0106 at 1.067.

ECB’s Lane stresses agility in rate path amid elevated uncertainty

ECB Chief Economist Philip Lane highlighted the importance of maintaining "agility" in monetary policy decisions during a speech today. Lane emphasized that in the current environment of elevated uncertainty, ECB’s "prudent" approach will be guided by a meeting-by-meeting strategy without pre-committing to any specific rate path.

Lane outlined that the pace of monetary easing will depend on the balance of risks. If the inflation outlook or economic momentum experiences upside shocks, "monetary easing can proceed more slowly " compared to the December projections.

Conversely, in the case of downside shocks, the easing process could accelerate. He further noted that the rate path would also depend on ECB’s "ongoing assessment of underlying inflation dynamics and the strength of monetary policy transmission."

Eurozone CPI finalized at 2.2% in Nov, core at 2.7% yoy

Eurozone headline inflation for November was finalized at 2.2% yoy, up from October’s 2.0%. Meanwhile, Core CPI, which excludes food, alcohol, and tobacco, eased to 2.7% yoy, down from October’s 2.9%.

Services contributed the most to the Eurozone annual inflation rate, adding +1.74 percentage points, followed by food, alcohol, and tobacco (+0.53 pp) and non-energy industrial goods (+0.17 pp). Energy, on the other hand, detracted -0.19 percentage points, reflecting subdued demand and easing energy prices.

At the broader EU level, headline inflation was finalized at 2.5% yoy. Among member states, Ireland registered the lowest annual inflation at 0.5%, followed by Lithuania and Luxembourg (both at 1.1%). On the high end, Romania recorded the highest inflation at 5.4%, with Belgium (4.8%) and Croatia (4.0%) close behind. Compared to October, inflation fell in four EU member states, remained unchanged in three, and rose in twenty.

UK CPI accelerates to 2.6% in Nov, core CPI up to 3.5%

UK CPI accelerated from 2.3% yoy to 2.6% yoy in November, matched expectations. Core CPI, (excluding energy, food, alcohol and tobacco), accelerated from 3.3% yoy to 3.5% yoy, below expectation of 3.6% yoy. CPI goods annual rate rose from -0.3% yoy to 0.4% yoy , while CPI services annual rate was unchanged at 5.0% yoy.

Japan's export rises 3.8% yoy in Nov, while import falls -3.8% yoy

Japan’s exports rose 3.8% yoy in November to JPY 9.152T, supported by increased shipments of chip-making equipment to Taiwan and nonferrous metals to China, marking the second consecutive month of export growth. Imports, however, fell -3.8% yoy to JPY 9.270T, marking their first decline in eight months due to reduced demand for crude oil from Saudi Arabia and electronics parts from Taiwan.

The overall trade deficit stood at JPY -117.6B, extending its red streak to five months. On a seasonally adjusted basis, the deficit widened to JPY -384B from JPY -229B in October, as imports increased 1.9% mom, outpacing the 0.2% mom rise in exports.

Trade with key partners highlighted persistent imbalances. Japan recorded a JPY 664.03B trade surplus with the US, despite exports falling -8.0% yoy, while imports dipped slightly by -0.6% yoy.

Conversely, its trade deficit with China expanded to JPY 682B, as exports grew 4.1% yoy, and imports rose 4.2% yoy.

The trade gap with the EUR remained significant at JPY 210.19B, with exports plunging -12.5% yoy, while imports decreased -5.4% yoy.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.8903; (P) 0.8939; (R1) 0.8963; More…

Intraday bias in USD/CHF remains neutral as consolidations continue below 0.8974 temporary top. While deeper pullback cannot be ruled out, outlook stay bullish as long as 0.8735 support holds. Break of 0.8974 will resume larger rise from 0.8374 to 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.

USDJPY remains steady, though at narrower range on Wednesday, awaiting the FOMC verdict later today.

Tuesday’s dip from new three-week high, which interrupted a six-day rally, is likely to be short-lived, as the dollar remains well supported and yen under pressure on wide gap between Fed and BoJ monetary policies.

Fed is expected to deliver a 25 basis points rate cut today, in an action that many see as hawkish cut due expected slowdown in policy easing in 2025, against previous estimations, while Japan’s policymakers will meet on Thursday and widely expected to keep interest rate unchanged.

Bullish technical picture on daily chart adds positive outlook for the dollar (the action remains underpinned by rising thick daily Ichimoku cloud, MA’s create multiple bull-crosses and momentum is positive).

Firm break of cracked Fibo barrier at 153.65 (61.8% retracement of 156.74/148.64 pullback) to generate fresh bullish signal for acceleration towards 154.83 (Fibo 76.4%) and 156.74 (Nov 15 peak) in extension.

Res: 154.47; 154.83; 155.88; 156.74.
Sup: 153.16; 152.87; 152.69; 152.30.

• The FOMC meeting today is highly anticipated due to uncertainty surrounding future US monetary policy.
• Markets expect a 25 bps rate cut today and a slower pace of easing in 2025 due to President-elect Trump’s policies.
• The Fed’s reverse repo rate may be adjusted, potentially impacting the US Dollar’s strength.

The FOMC meeting today is key as interest rate meetings tend to be from the US. However, today’s meeting is even more intriguing given all the noise and uncertainty moving forward.

The Fed is shifting its policies from being very restrictive to more balanced. Recent data has shown some stickiness in inflation and with President-elect Trump aiming to boost US economic growth, the Fed is likely to take a careful and slow approach to easing policies in 2025. This for now is where the focus will lie.

Heading into the meeting, markets are expecting around 73 bps of rate cuts through December 2025. This would include the proposed 25 bps cut today, meaning just 50 bps cuts in 2025.

Source: LSEG (click to enlarge)

What to Expect from the FOMC Meeting?

The main driver of late when it comes to US monetary policy decisions has been the US Labor market. The labor market is slowing down, with fewer new jobs, a drop in full-time employment, and a small rise in unemployment. These changes give the Fed a reason to move toward a more balanced policy approach.

Inflation which had been the main focus for the first 6-8 months of the year did take a backseat over the past few months. However recent data suggests that this may rear its ugly head once more in 2025.

Focus heading into the meeting will focus on updates to the Feds economic projections. In particular, the number of rate cuts we may expect in 2025. The consensus heading into the meeting is that President-elect Trump’s plans for stricter immigration controls, new tariffs, and cutting taxes for individuals and businesses are expected to lead the Fed to take a more cautious and slower approach to easing policies in 2025.

I do think that this is on point however, the rhetoric of the Fed will be important. Heading into the meeting we have heard a host of comments from Fed Policymakers who have supported more gradual easing in 2025.

FED Policymaker Comments in the Lead Up to December 18 Meeting:

Source: LSEG (click to enlarge)

The comments from policymakers definitely show a willingness for a slower rate cut path moving forward. In theory this should lead to some US Dollar strength as well as a rise in US Yields.

Having said that, I do expect a pause in January as the meeting will arrive just 9 or so days after President Elect Trump takes office. The March meeting should provide some time to gauge the effects of proposed Trump policy and might give markets a clearer picture for 2025.

Feds Reverse Repo Rate

The minutes from the last FOMC meeting made reference to a possible technical adjustment to the Fed’s reverse repo rate and this may be something to watch as well. The proposal is to lower the reverse repo rate by 5 basis points (bp), bringing it down to match the floor at 4.25%. At the same time, the Fed would also lower its whole interest rate range by 25 bp.

This means the new floor would drop to 4.25%, the ceiling would fall to 4.5%, and the reverse repo rate would shift to align with the new floor.

The other important rate, the interest on reserves (which is what the Fed pays banks for holding their extra money), would also go down by 25 bp, staying 15 bp above the floor as it is now.

One big takeaway here is that lowering the reverse repo rate would make the facility less appealing for banks to use. Eventually, as banks reduce their use of this facility, their reserves (money they hold at the Fed) could shrink.

Is such a move a positive or negative for the US Dollar?

In theory, if the reverse repo rate is lowered, as the Fed is considering, it reduces the interest banks and financial institutions earn when parking their cash with the Fed. This could make US interest rates slightly less attractive. With lower interest returns, some foreign investors might look for better opportunities in other countries with higher rates. If this happens, it could put mild downward pressure on the US Dollar’s strength.Something else to consider heading into the meeting, could such a move cancel out any US Dollar strength that may be gained should the Fed point to a slower rate cut path in 2025? Time will tell.

US Dollar Index

From a technical standpoint, the dollar is at  crossroads as it is back around the multi-month key level at 107.00.

I do expect the US Dollar to maintain its dominance heading into 2025 especially if the Fed meet markets expectations regarding slower cuts in 2025.

This should keep the rate differential in play which has benefited the US Dollar since October.

As the Dollar has defied its seasonal trend by strengthening thus far in December, it would take a surprise later in the day to change the narrative. I do expect this narrative to persist until President trump takes office and begins enacting his policies.

US Dollar Index (DXY) Daily Chart, December 18, 2024

Source: TradingView.com (click to enlarge)

Support

• 106.50
• 106.00
• 105.63

Resistance

• 107.50
• 108.00
• 109.00

The Federal Reserve is set to announce its interest rate decision today at 21:00 GMT+2, with Fed Chair Jerome Powell holding a press conference 30 minutes later. According to Forex Factory, the market expects a rate cut to 4.25%-4.50% from the current 4.50%-4.75%.

Analysts at Apollo Global Management, in their Economic Outlook, predict:

→ In 2025, the Fed will continue lowering rates but at a slower pace than the market anticipates;

→ By the end of 2025, the rate is expected to settle at 4.0%.

In anticipation of today's decision, the currency markets are experiencing a period of calm.

The technical analysis of the EUR/USD chart shows that the pair consolidates between the upper boundary of a descending channel and the lower black support line, forming a narrowing triangle pattern (highlighted in purple).

Today's Fed meeting could trigger a surge in volatility, potentially driving sharp movements in USD pairs. For EUR/USD, opposite scenarios are possible:

→ An upward movement with a bullish breakout of the upper boundary of the long-term descending channel;

→ Continuation of the downtrend with a breakout below the lower black support line.

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AUD/USD hit new 2024 low and trading near the lowest since Oct 2023 on Thursday, after strong bearish signal was generated on Tuesday’s close below former annual low (0.6348, Aug 5 spike low).

Aussie remains pressured from slower than expected growth of Chinese economy and falling commodity prices, with expectations for Fed’s hawkish cut today to add to negative outlook.

The US central bank is widely expected to cut interest rates by 25 basis points on today’s policy meeting, but markets anticipate that the Fed will significantly downgrade its projections for 2025 (probably to two rate cuts from initially planed four), due to elevated inflation and quite strong economy.

Also, signals that Trump’s administration will fully focus on boosting the US economy, require additional caution, as faster economic growth would fuel inflation and force the central bank to continue monitoring the situation and keep adjusting its policy view.

The pair is on track to register a sustained break of 0.6348 pivot that would open way for attack at 2023 low (0.6270) and probably unmask 2022 low (0.6170) on stronger bearish acceleration.

Firmly bearish daily studies (negative momentum is strengthening, MA’s in full bearish setup with converging 100/200DMA’s on track to form a Death cross) support the notion, with limited upticks on oversold conditions to mark positioning for fresh push higher.

Falling 10DMA (0.6377) should ideally cap, with extended upticks to stall under 0.6430/40 zone (falling 20DMA / former low of Nov 14) to keep larger bears intact.

Res: 0.6348; 0.6377; 0.6440; 0.6465.
Sup: 0.6300; 0.6270; 0.6100; 0.6170.