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Canada’s headline CPI slowed to 1.9% yoy in November, dipping below expectations of 2.0% yoy and down from 2.0% yoy in October. The deceleration was broad-based, with declines in travel tour prices and the mortgage interest cost index contributing significantly to the slower pace of inflation.

Excluding gasoline, the CPI rose 2.0% yoy, cooling from October’s 2.2% yoy. On a month-over-month basis, inflation was flat in November, following a 0.4% mom increase in the prior month.

While headline inflation eased, Canada’s core inflation measures sent mixed signals. CPI median increased slightly from 2.5% yoy to 2.6% yoy (above forecasts of 2.4% yoy). CPI trimmed climbed from 2.6% yoy to 2.7% yoy (also exceeding expectations of 2.5% yoy). However, CPI common, the measure often considered the most stable, declined from 2.2% yoy to 2.0% yoy, missing the anticipated 2.1% yoy.

Full Canada CPI release here

The British pound is showing little movement on Tuesday, after jumping 0.57% a day earlier. In the European session, GBP/USD is trading at 1.2698, up 0.13% on the day.

UK wage growth higher than expected

UK wage growth excluding bonuses climbed 5.2% y/y in the three months to October, up from an upwardly revised 4.4% in the previous period and well above the market estimate or 4.6%. Pay growth in the private sector hit 5.4%, up from 4.6%.

Wage growth has been accelerating and that is a concern for the Bank of England, which is worried about rising inflation. In October, CPI rose to 2.3% y/y, up from 1.7% a month earlier and hit its highest level in six months. November’s inflation report will be released on Wednesday and is expected to accelerate to 2.6%. BoE policymakers will be keenly focused on services inflation, which has been sticky at 5%, much too high for the BoE’s liking.

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.

November job growth was much better than expected with a gain of 173 thousand in the three months to October. This was lower than the 253 thousand gain in the previous period but blew past the market estimate of -12 thousand. The labor market is cooling but remains in decent shape, which means that the BoE can focus on inflation data for its rate decisions and not worry about the labor market.

In the US, it was a familiar story as services headed higher while manufacturing slipped lower. The Services PMI rose in December to 58.5 from 56.1 in November and above the forecast of 55.7. This was the highest level in over three years as the services economy is showing impressive expansion.

The manufacturing sector is in dreadful shape and weakened to 48.3, down from 49.7 in November and below the market estimate of 49.8. Output and new orders are down as the demand for exports remains weak.

GBP/USD Technical

• 1.2719 is a weak resistance line. Above, there is resistance at 1.2753
• 1.2664 and 1.2630 are the next support levels

The December ZEW Economic Sentiment survey delivered a notable improvement in outlook for both Germany and the Eurozone, driven by optimism surrounding interest rate cuts and policy shifts.

German ZEW Economic Sentiment index surged to 15.7 from 7.4, far exceeding expectations of 7.0. However, Current Situation Index continued to deteriorate, slipping further to -93.1 from -91.4, reflecting ongoing economic weakness in the near term.

Eurozone ZEW Economic Sentiment also showed a strong uptick, rising to 17.0 from 11.6. Yet, the Current Situation Index revealed a sharper decline, falling 11.2 points to -55.0.

ZEW President Achim Wambach attributed the improved sentiment to expectations of economic policies favoring private investment, particularly as Germany approaches snap elections.

Additionally, growing confidence in further ECB interest rate cuts next year has bolstered the outlook. Wambach noted that survey respondents remain unconcerned about inflation, suggesting the recent uptick is viewed as “a temporary phenomenon” and inflation rates are expected to stabilize or decline in 2025.

Full German ZEW release here.

The dollar index firmed in early Tuesday trading and pressuring the peaks of recovery leg from 105.37 (Dec 6 low).

Although last Fri/Mon action was shaped in Doji candles and signaled indecision, this was likely a consolidation before recovery resumes.

Fresh bulls probe through cracked Fibo barrier at 106.71 (50% retracement of 108.04/105.37 pullback) with firm break here to generate fresh signal for continuation of recovery leg towards targets at 107.02 /41 (Fibo 61.8% and 76.4% respectively) guarding key barrier at 108.04 (2024 peak of Nov 22, also the highest since Nov 2022).

Near-term bullish bias is expected to remain intact while the price stays above 10DMA (106.32) and deeper dips stay above 106.00 handle

Technical picture on daily chart is overall bullish and contributes to brighter fundamental outlook, as markets anticipate that US interest rates will remain elevated.

Fed is widely expected to cut interest rates by 25 basis points on Wednesday but will remain very cautious in shaping the monetary policy in the near future, as inflation remains elevated and expected to rise further in anticipated economic boost by Trump’s administration, while US economy remains in good condition overall.

Res: 106.86; 107.02; 107.41; 108.00.
Sup: 106.32; 106.00; 105.75; 105.37.

Finland's ECB Governing Council member Olli Rehn highlighted growing risks to Europe’s economic outlook with the uncertainty over trade policy as a key downside factor.

Rehn warned that Europe must be prepared to respond to potential trade conflicts with the US, emphasizing that while “negotiation is preferable,” EU’s position could be strengthened by demonstrating readiness to implement “countermeasures” against any US tariff threats.

Rehn also provided clarity on ECB’s monetary policy direction, stating it is now clearly leaning toward further easing. However, the “speed and scale of rate cuts” will remain data-dependent and decided at each meeting based on a thorough assessment of economic developments.

Eurozone goods exports rose 2.1% yoy to EUR 254.0B in October. Goods imports rose 3.2% yoy to EUR 247.2B. Trade balance stood at EUR 6.8B surplus. Intra-Eurozone trade rose 2.2% yoy to EUR 229.2B.

In seasonally adjusted term, exports fell -1.6% mom to EUR 232.5B. Imports rose 1.3% mom to EUR 226.5B. Trade surplus narrowed from EUR 12.6B in September to EUR 6.1B, versus expectation of EUR 11.9B. Intra-Eurozone trade fell -0.6% mom to EUR 213.5B.

Full Eurozone trade balance release here.

German Ifo Business Climate Index declined to 84.7 in December, missing expectations of 85.6 and falling from 85.7 in November. This drop highlights persistent economic challenges in Europe’s largest economy, with sentiment continuing to slide amid growing uncertainty. While Current Assessment Index surprised to the upside, rising to 85.1 (above forecasts of 84.0), Expectations Index fell sharply fro 87.0 to 84.4, undershooting the anticipated 87.5.

Sectoral data painted a concerning picture. Sentiment in manufacturing dropped further, from -22.0 to -24.8. Services sector weakened from -3.5 to -5.6. Trade saw a sharper decline from -26.6 to -29.5. Meanwhile, the only bright spot came from construction, where sentiment improved from -29.0 to -26.1, though it remains firmly in negative territory.

The Ifo Institute underscored the gravity of the situation, warning that “the weakness of the German economy has become chronic.”

Full German Ifo release here.

The EUR/USD pair is trading neutrally around 1.0510 as market participants adopt a cautious stance ahead of the Federal Reserve's upcoming decision on interest rates. With the December meeting set to begin tonight and conclude tomorrow, all eyes are on the potential rate adjustment. The prevailing expectation is a 25 basis point cut, with a 94% probability factored by market consensus. Additionally, there's a 37% chance that this might be the only cut or that rates might not change at all in 2025, contributing to the current market apprehension.

As inflation concerns loom for 2025, influenced by uncertain policy decisions and economic stimulation measures, the Fed is expected to adopt a more cautious tone in its communications. This approach is aimed at providing the flexibility to respond effectively to economic indicators as they evolve.

Today, the market is also focused on the release of November's retail sales and industrial production data from the US. These indicators are crucial for assessing the current state of the US economy and could influence the Fed's policy direction.

Technical analysis of EUR/USD

H4 chart: the EUR/USD has recently completed a correction wave at 1.0533 and appears poised for a downward movement towards 1.0420. Following the achievement of this target, a corrective move to 1.0475 is expected. Post-correction, another decline towards 1.0340 may commence. The MACD indicator supports this bearish outlook, with its signal line below zero and trending downwards, suggesting further declines.

H1 chart: on the H1 chart, the pair has retraced from 1.0533 and initiated a downward wave targeting 1.0485. Upon reaching this level, the formation of a consolidation range is anticipated. A breakout below this range could lead to a continued descent towards 1.0440 and potentially extend to 1.0420. The Stochastic oscillator corroborates this scenario, with its signal line currently below 50 and expected to drop further towards 20, indicating a continuation of the bearish momentum.

Daily Pivots: (S1) 194.18; (P) 195.03; (R1) 196.41; More...

GBP/JPY's rebound from 188.07 resumed by breaking through 194.98 and intraday bias is back on the upside. Corrective pattern from 180.00 could be extending with another rising level. Further rise should be seen to 199.79 resistance. On the downside, break of 192.84 minor support will turn bias back to the downside for 188.07 instead.

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). The range of consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09. However, decisive break of 175.94 will argue that deeper correction is underway.

Daily Pivots: (S1) 161.40; (P) 161.80; (R1) 162.47; More...

Intraday bias in EUR/JPY is turned neutral first with current retreat. Another rise is in favor as long as 159.09 support holds. Sideway pattern from 154.40 might still be in progress with another rising leg. Break of 162.46 will target 166.67 resistance. Nevertheless, break of 159.09 will bring retest of 156.16 instead.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.