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The Federal Reserve Open Market Committee (FOMC) cut the federal funds rate to the 4.25% to 4.50% range and announced it would continue its balance sheet runoff.

The Fed maintained its language on growth and inflation, stating "economic activity has continued to expand at a solid pace", that the "labor market conditions have generally eased" and that "inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated."

On the future path of policy, the statement added more specificity that it is considering "the extent and timing" of additional adjustments to the target range. Seemingly setting up the possibility of a pause in interest rate cuts.

The Fed's Summary of Economic Projections was updated from September:

• The median projection for real GDP growth was upgraded to 2.5% in 2024, 2.1% in 2025, 2.0% in 2026, 1.9% in 2027, and 1.8% over the long run (from 2.0%, 2.0%, 2.0%, 2.0% and 1.8%).
• The median unemployment rate forecast was upgraded slightly to 4.2% in 2024, 4.3% in 2025, 4.3% in 2026, 4.3% in 2027, and 4.2% over the long run (from 4.4%, 4.4%, 4.3%, 4.2%, and 4.1%).
• On inflation, the median estimate for core PCE was raised to 2.8% in 2024, 2.5% in 2025, and 2.2% in 2026, and 2.0% in 2027 (from 2.6%, 2.2%, 2.0%, and 2.0%).
• The median projection for cuts to the fed funds rate was reduced by 50 basis points over 2025 and 2026. This raised the level of the fed funds rate to 3.9% in 2025, 3.4% in 2026, 3.1% in 2027, and the long-run neutral rate was assumed to be 3.0% (from 3.4%, 2.9%, 2.9% and 2.9%).

President of the Cleveland Fed, Beth Hammack, voted against today's decision, having preferred for the Fed to have paused at this meeting.

Key Implications

After confirming that the Fed followed through on its 25 bp cut, everyone immediately moved to see how the central bank's view on future rate cuts shifted. No surprise, the Fed expects to be more cautious in 2025 than it forecast prior to the election of President Trump. It has removed 50 bps in cuts, while it has marked up its outlook for inflation. We'd also note that more members are aligned to the median view of 50 basis points in cuts than were aligned on 100 bps in September.

Market pricing agrees with the Fed's more cautious approach, with an increasing likelihood that the Fed will have to pause rate cuts in January. While we don't think investors should rule out a January cut completely, with the Fed's preferred inflation rate stuck at 2.8% year-on-year, and expectations that President Trump will follow through on his inflationary political strategy, it makes sense that the Fed will be much more cautious come the New Year.

Dollar jumps across the board after Fed's hawkish rate cut, with economic projections giving a strong nod to market expectations of slower policy easing, and a higher terminal rate.

EUR/USD's fall from 1.0629 resumed by breaking through 1.0452. Decline from 1.1213 might also be resuming and break of 1.0330 will target 61.8% projection of 1.0936 to 10330 from 1.0629 at 1.0254.

USD/CHF's breach of 0.8974 suggest that the brief retreat has completed. Further rise should be in progress as rally from 0.8374 resume to 61.8% projection of 0.8374 to 0.8956 from 0.8735 at 0.9095.

Fed lowered its benchmark interest rate by 25 bps to 4.25–4.50%, as widely expected. However, the decision was not unanimous, with Cleveland Fed President Beth Hammack dissenting, favoring a pause in rate cuts.

The updated median economic projections reflect a more cautious approach to easing.

Fed now expects rates to fall to 3.9% by the end of 2025, equivalent to just two additional 25bps cuts, a notable shift from the 3.4% projected in September.

Rates are forecast to decline further to 3.4% by the end of 2026 and 3.1% by 2027, both revised up from 2.9%. The longer-run neutral rate was also adjusted upward from 2.9% to 3.0%, indicating that the Fed anticipates rates will reach neutrality only by 2027, underlining a much slower easing pace.

Inflation projections also revised higher, justifying the Fed’s cautious outlook. The headline PCE inflation forecast for 2025 was raised from 2.1% to 2.5%, while core PCE inflation was increased from 2.2% to 2.5%, reflecting persistent inflationary pressures that warrant a more measured approach to policy normalization.

Full FOMC statement here.

Full Fed Summary of Economic Projections here.

Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.

• EURGBP retreats after hitting resistance at 0.8325
• Broader downtrend remains intact, but momentum weakens
• Break below 0.8225 could confirm trend continuation
• Rebound above 0.8450 may signal bullish trend reversal

EURGBP traded lower this week, after hitting resistance near the key territory of 0.8325. Overall, the pair is trading below all three of the plotted moving averages, below the near-term downward sloping line drawn from the high of August 8, and well below the longer-term downtrend line taken from the high of February 2, 2023.

This keeps the overall outlook negative, but the short-term oscillators suggest that there may be another bounce before the next leg south. The RSI, although below 50, has ticked up, while the MACD, despite hovering below zero, has bottomed and just poked its nose above its trigger line. Both indicators detect weakening bearish momentum.

If or when the bears decide to take charge again, a dip below 0.8225 may be needed for the prevailing downtrend to extend. Such a dip would confirm a lower low and may see scope for declines towards the 0.8120 zone, marked by the inside swing highs of April 2016. If the sellers do not stop there, the next line of defense may be the round figure of 0.8000.

On the upside, a break above the long-term downtrend line and the key resistance zone of 0.8450 may be needed to confirm a bullish trend reversal. In such a case, the bulls may feel confident to climb towards the 0.8545 area, or even higher, to the 0.8525 zone, marked by the high of August 8.

To sum up, EURGBP remains in a downtrend and a dip below the latest low of 0.8225 could take the price into territories last seen back in 2016.

British pound is showing little movement on Wednesday. Early in the North American session, GBP/USD is trading at 1.2679, down 0.07% on the day.

UK inflation climbs to 2.6%

Inflation in the UK climbed to 2.6% in November, its highest level since March. The rise was driven by higher costs for petrol and food as well as an increase in the tobacco duty in the budget. Services inflation, which has been persistently high, was unchanged at 5%. The CPI reading was in line with the market estimate and the pound has showed almost no reaction. Monthly, CPI increased 0.1%, compared to 0.6% in October and also matching expectations.

Core inflation, which is considered a more reliable gauge of inflation trends, climbed to 3.5% y/y, up from 3.3% in October and just below the market estimate of 3.6%. This was the highest level since August. The acceleration in core inflation will be a source of concern for the Bank of England, as will be service inflation and Tuesday’s employment report which showed wage growth excluding bonuses rising to 5.2% from 4.4%.

The rise in inflation cements a pause from the BoE at Thursday’s rate meeting. The central bank has cut rates twice since June, bringing the cash rate to 4.75%. The BoE has largely contained inflation but will want to see evidence that inflation is moving towards the 2% target before delivering further rate cuts.

The BoE is widely expected to maintain the benchmark rate at 4.75% at Thursday’s rate meeting. The central bank lowered rates for a second time this year in November but will want to see inflation fall closer to the 2% target before resuming rate cuts.

The Federal Reserve makes its rate announcement later today. There isn’t much excitement around the decision, with the market pricing in a quarter-point cut at close to 100%. Investors will be interested in the updated economic and interest rate projections. President-elect Trump will take office in January which adds significant uncertainty for Fed policymakers.

GBP/USD Technical

• GBP/USD is testing support at 1.2703. Below, there is support at 1.2676
• 1.2739 and 1.2766 and the next resistance lines

Markets

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.