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Business confidence has continued to rise. However, there remains limited momentum in activity, and ongoing inflation pressures.

Key results (December 2023)

• Business confidence: 33.2 (Prev: 30.8)
• Expectations for own trading activity: 29.3 (Prev: 26.3)
• Activity – same month one year ago -4.2 (Prev: -12.5)
• Inflation expectations: 4.61% (Prev: 4.79%)
• Pricing intentions: 50.2 (Prev: 46.8)

The ANZBO measure of business confidence rose to 33.2 in December. That’s the eighth rise in a row, and takes confidence back to levels we last saw in 2015. We also saw a further rise in firms’ expectations for their own trading activity.

However, while business confidence is on the rise, digging into the details we’re left with a still soft picture of economic activity at the close of 2023. Most businesses (a net 4%) actually reported that trading activity has declined over the past year. While that’s not as low as it was last month, it still points to weakness in economic activity. There’s been particular weakness in the retail and construction sectors, consistent with the feedback we’ve received from businesses around the country.

There was also some notable news on the inflation front. Expectations for inflation over the coming year have continued to ease, dropping from 4.8% previously to 4.6% now. That’s still high, but moving in the right direction.

However, there were more worrying signs when we look at businesses’ expectations for their own finances. The number of businesses who expect their operating costs to rise picked up to 76.2% (from 73.9% previously). There’s also been an increase in the number of businesses who are planning on increasing their prices to 50.2%. That’s the third increase in a row.

Those continued cost and price pressures chime with comments we’ve heard from our own business contacts who have reported that operating cost pressures remain firm. In many cases, they’ve also told us it’s become harder to pass cost increases into output prices. We expect that continued pressure on operating costs will mean that domestic inflation eases only gradually over the year ahead.

Overall, while confidence is up, we’re still left with a picture of limited momentum in economic activity and lingering inflation pressures.

Hybrid – 5 December 2023

Members participating

Michele Bullock (Governor and Chair), Ian Harper AO, Carolyn Hewson AO, Steven Kennedy PSM, Iain Ross AO, Elana Rubin AM, Carol Schwartz AO, Alison Watkins AM

Others participating

Christopher Kent (Assistant Governor, Financial Markets), Marion Kohler (Acting Assistant Governor, Economic), Carl Schwartz (Acting Head, Domestic Markets Department)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Penelope Smith (Head, International Department), Tom Rosewall (Acting Head, Economic Analysis Department)

International economic developments

Members commenced their discussion of international economic developments by noting that the information on global inflation had been a little more encouraging over the prior month. Headline inflation rates had declined, driven by a fall in oil prices, while core inflation had continued to ease. Goods prices had declined in some countries in preceding months. However, inflation in the services sector had declined only gradually, reflecting still-tight labour markets, and housing inflation remained strong in a number of countries. Central banks generally expected inflation to return to their targets in late 2024 or 2025.

Members observed that output growth in several advanced economies had slowed noticeably in response to tighter monetary policy and cost-of-living pressures, particularly in Europe. In the United States, output growth had held up better than expected, helped by resilient consumption. Labour markets remained tight, but conditions had clearly eased in response to the slowing in economic activity. Job vacancies had fallen and unemployment rates, while still very low, had increased over preceding months, including in the United States. The pace of wages growth remained above levels considered consistent with central banks' inflation targets for some economies, but they had generally moderated in response to the gradual easing in labour market conditions and inflation. As a result, core inflation was expected to continue to moderate.

Turning to developments in China, members observed that the latest indicators of activity had generally been positive, and growth in retail sales and industrial production in October had remained strong. Activity had been supported by the continued recovery in services consumption after the pandemic, along with a range of supportive fiscal policy measures. There had, however, been little sign of improvement in the property sector. Real estate investment had continued to decline because of weak demand and liquidity constraints facing property developers.

Nonetheless, the continued positive information about the Chinese economy outside the property sector had supported iron ore prices, which had increased a little over the prior month and remained at high levels. Coking coal prices had fallen as supply disruptions in Australia had been resolved. Oil and gas prices had declined further over the prior month, as demand had eased in line with slower global growth and amid signs that the Hamas–Israel conflict seemed not to be spreading more widely across the region. Oil prices were around 15 per cent lower than their recent peak in late September.

Domestic economic conditions

Turning to the domestic economy, members observed that inflation had continued to moderate. The monthly CPI indicator for October showed that annual inflation had eased, with declines in the prices of petrol and holiday travel. Inflation excluding volatile items had also eased, largely reflecting the flow-through of declines in global goods price inflation. Rents had declined in October, but this owed entirely to an increase in Commonwealth Rent Assistance, which offset pressure from very tight rental markets in the capital cities. Tight rental markets were likely to be an ongoing source of inflationary pressure for some time. There had been little new information on inflation in other parts of the services sector. Firms in the Bank's liaison program expected price increases to moderate over the coming year, due to subdued demand and stronger competition among retailers, though many firms had also reported persistent cost pressures. Members noted some measures of inflation expectations had moved a little higher over preceding months but generally remained consistent with the inflation target.

Wages growth had picked up significantly over the preceding year or so. The Wage Price Index had recorded its highest quarterly growth rate since the series commenced in the late 1990s, reflecting the implementation of the Fair Work Commission's decision to significantly increase minimum and award wages. However, on the evidence available, spillovers to non-award wages did not appear to be larger than usual. Year-ended growth in wages was a little stronger than had been expected but the most recent forecasts had wages growth peaking at around 4 per cent by the end of the year. The wages growth outcome for the September quarter was still consistent with these forecasts, but members noted that the balance of risks had shifted a little to the upside. Conversely, there was some evidence of slowing in wages growth in those parts of the labour market where conditions had eased. In liaison, firms had reported that they generally expect wages growth to ease over the year ahead.

Members observed that labour market conditions remained tight, but less so than earlier in the year, as the demand for labour had adjusted to slower economic growth and labour supply had increased. Employment growth had eased to be a little below the rate of growth in the working-age population over the preceding few months, with the unemployment rate drifting up to 3.7 per cent. Members noted that the shifting composition of employment growth towards more part-time jobs and a decline in average hours worked over preceding months were consistent with hours worked being a key margin of adjustment to slower growth in demand. Forward-looking indicators, such as hiring intentions reported in business surveys and information from the Bank's liaison, pointed to a further easing in the demand for labour in coming months.

Output growth in Australia had slowed over the prior year to a rate below trend. The national accounts, which were scheduled to be released the day after the meeting, were expected to show that GDP growth had remained at a below-trend rate in the September quarter. Members discussed the implications for productivity of below-trend growth in economic activity and potential explanations for this outcome. While growth in household consumption had been weak, and was negative in per capita terms, overall demand had been supported by strong business investment and public demand.

Members noted that growth in household consumption was expected to have remained subdued in the September quarter, as higher interest rates and cost-of-living pressures weighed on real household disposable incomes and household spending. Timely indicators suggested that growth in consumer spending had also remained subdued into the December quarter. The increased importance of the November 'Black Friday' sales had distorted usual seasonal spending patterns and would make it difficult to obtain a clear reading of the underlying momentum in retail spending. Housing prices had increased further in November and had more than fully recovered their earlier declines. If sustained, higher household wealth would support consumer spending in the period ahead.

Despite slow growth in consumption, survey measures of business conditions had remained steady over prior months and were generally around average levels. The level of capacity utilisation had trended down over the prior year but remained high. Members noted that shortages of labour and materials remained a challenge in parts of the construction sector. Firms in the liaison program reported that investment intentions remain positive, reflecting solid cashflows and a large pipeline of construction and other projects, which was broadly in line with the results of the most recent ABS Capital Expenditure Survey.

International financial markets

Most advanced economy central banks had left policy rates unchanged since September, with most judging financial conditions to be restrictive. Central banks had continued to emphasise that policy rates may still need to rise further, but most noted that the risks to the outlook had become more balanced as inflation eased and labour market conditions became less tight. Market participants' expectations for policy rates in many advanced economies had been revised lower over the preceding months, with reductions in policy rates priced in by the middle of 2024. However, central banks had emphasised that it was too early to consider the timing of rate reductions.

Government bond yields in advanced economies had declined since the previous meeting, reversing most of the substantial increase over preceding months. The decline in bond yields had resulted from lower real yields, which reflected changing market expectations for policy rates as well as a decline in market-implied inflation expectations. Estimated term premia for sovereign bonds had also declined.

Conditions in private funding markets had loosened a little since the previous meeting. Equity prices had risen strongly as longer term interest rates fell and investors gained confidence that inflation could be returned to central banks' targets without significant declines in corporate profits, economic activity or employment. Corporate bond yields had declined alongside the fall in government bond yields and a narrowing of credit spreads.

In China, government bond yields had increased slightly alongside better-than-expected economic data and the announcement of further government bond issuance to support investment. Equity prices in China were little changed. Prices of securities issued by property developers remained at severely distressed levels, but had been supported in November by reports that authorities had established a list of developers eligible for additional funding.

The Australian dollar had appreciated by around 2 per cent against the US dollar and around 1 per cent on a trade-weighted basis since the previous meeting. Members observed that the trade-weighted Australian dollar was trading near early-2022 levels.

Domestic financial markets

Members noted that financial conditions in Australia were restrictive. Total household debt payments as a share of disposable income had increased significantly during the tightening phase. Although scheduled mortgage payments had increased to an all-time high of 10 per cent in October, estimated payments for personal credit were low relative to history because households' use of personal credit had declined significantly since 2008. As a result, total household debt payments remained below their estimated historical peak. Scheduled mortgage payments will continue to rise as borrowers with expiring fixed-rate loans roll off onto higher mortgage rates and lenders pass on the cash rate increase in November to lending rates.

New housing loan commitments had increased further, driven largely by investors and first home buyers. Commitments were 17 per cent above the February 2023 trough, though they were still almost 25 per cent below their peak in January 2022 and at low levels as a share of housing credit. Total extra payments into borrowers' mortgage offset and redraw accounts were still positive but were running lower in 2023 than the pre-pandemic average. This was consistent with pressures on disposable incomes from increases in interest rates and the broader rise in the cost of living.

Market participants' expectations for the path of the cash rate, as implied by market pricing, were a little lower than just prior to the November meeting. Markets were pricing in a 40 per cent chance of a further increase in the cash rate at future meetings. Markets were then pricing in some chance of a reduction in the cash rate by late 2024. This was broadly consistent with the views of market economists, most of whom expected no further rate increases and that the first reductions in the cash rate would be later in 2024.

Members discussed a paper that reviewed the Bank's approach to reducing its holdings of government bonds that had been purchased during the pandemic to support markets and provide economic stimulus. The current approach – endorsed by the Board in May – was to hold these bonds until maturity rather than selling them prior to maturity. This approach recognised, among other considerations, that the Bank's balance sheet was already set to decline rapidly as loans under the Term Funding Facility matured.

Members decided that the approach of holding the bonds to maturity remained appropriate but agreed to keep this under active consideration, including because of the Bank's exposure to interest rate risk and given the relatively gradual decline in the Bank's portfolio of bonds compared with some other advanced economy central banks. The initial tranche of Term Funding Facility maturities in September had passed smoothly, with the larger remaining tranche of maturities to occur through to mid-2024. These flows would continue to provide information on how financial markets respond as the Bank's balance sheet declines. Members discussed the importance of considering the decline in the Bank's balance sheet in the context of the broader operational framework for implementing monetary policy, given that it will affect the size and composition of the balance sheet over the longer term.

Members discussed whether any decision to sell some of the Bank's holdings of Australian Government securities would best be implemented by selling to the market or, in the case of mutual agreement, to the Australian Office of Financial Management (AOFM). While selling directly to the AOFM would have several practical benefits, either approach would involve working closely with the AOFM to avoid market disruption.

Considerations for monetary policy

Turning to the policy decision, members noted that the limited economic data received over the prior month had been broadly in line with expectations. Inflation had continued to decline but remained high. Wages growth had reached 4 per cent a little sooner than had been expected but the staff judged that wages growth was unlikely to rise much further. Output growth had continued below trend and the labour market was tight but easing gradually. Members agreed that financial stability considerations were not a constraint on monetary policy at the current meeting.

Members noted that market expectations for policy rates in other countries had eased significantly over the prior month, while being little changed for Australia. Longer term bond yields had declined notably, perhaps signalling that markets were more confident that central banks would be able to reduce inflation back to their targets in a reasonable timeframe with current policy settings. Members also noted that, in Australia, households' required interest payments as a share of disposable income were much higher than in recent years but still below the level recorded in 2008.

In light of these observations, members considered whether to raise the cash rate target by a further 25 basis points or to hold the cash rate target steady.

The case to raise the cash rate target by a further 25 basis points was centred on the observations that inflation was expected to remain above target for a prolonged period and that there were risks this period could be extended. Members noted that inflation was increasingly being driven by domestic demand. They also observed that underlying inflation was higher in Australia than in several other countries. Furthermore, domestic demand was judged still to be running above the level consistent with the inflation target and growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined. Members noted that the staff's most recent forecasts, which were predicated on a lift in productivity growth, would see inflation return to the top of the target band by the end of 2025, rather than the midpoint of the band.

The case to hold the cash rate target constant reflected the view that the data over the prior month did not warrant a material revision to the outlook and that there is the possibility of a larger rise in the unemployment rate than anticipated. Members observed that monetary policy was working to bring aggregate demand and supply into closer alignment. They noted that the risk that it takes longer than expected to return inflation to target was balanced by the risk that aggregate demand slows more quickly than anticipated. Members acknowledged that consumption growth had been quite weak, as many households are experiencing a painful squeeze on their finances, with inflation and higher interest rates weighing on real disposable incomes. Members also noted that the pace of disinflation in some other countries over recent months had accelerated. If emulated in Australia, this would be helpful in bringing inflation back to target.

After weighing up these two options, members agreed that the case to leave the cash rate target unchanged at this meeting was the stronger one. Members agreed there was sufficient value in waiting for further data to assess how the balance of risks was evolving and how best to balance these risks when setting policy. They noted that there had been encouraging signs of progress towards the Board's objectives and that this needed to continue. Members also discussed the importance of preventing inflation expectations from drifting away from the inflation target and committed to monitoring this closely. At the time of the meeting, they agreed that inflation expectations remained consistent with the inflation target.

Members agreed that whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend on how the incoming data alter the economic outlook and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

The decision

The Board decided to leave the cash rate target unchanged at 4.35 per cent, and the interest rate on Exchange Settlement balances at 4.25 per cent.

Market Picture

The crypto market has started the new week with a correction sentiment, reducing capitalisation by 3% to $1.54 trillion in the last 24 hours. As is often the case with intense moves, Bitcoin looks more stable than the market, losing only 1.8% to $41.1K. Ethereum is down 2.3% to $2160.

Bitcoin is once again testing the local support it managed to hold last week. But we are attracted by a sequence of lower local highs, indicating an impressive selling proposition. We may be seeing profit taking from all the upside from the October lows. Working off this scenario suggests a pullback to the $38K area if the market falls below $40K. But even this potentially nasty drawdown looks to be just part of a larger bull cycle that Bitcoin is now moving within.

Ethereum is developing a retreat from the upper boundary of the trading channel, currently testing the early April peak area. The scenario of a shallow correction suggests a decline of about $100 more to $2060, but we should be ready for $1700 as well.

News Background

Morgan Creek Digital founder Anthony Pompliano believes that BTC continues to follow four-year market cycles fitting between halvings, and the next growth phase of the first cryptocurrency is now beginning.

The bitcoin-based NFT market will grow 100-fold in 2024, researchers at cryptocurrency exchange Bitget predict. The ORDI token, being the leading token of the Bitcoin ecosystem, is already capable of entering the top 30 in terms of market capitalisation during the next bull market. If the BTC ecosystem continues to expand, Bitcoin could reach $100K thanks to a surge in demand for the first cryptocurrency.

The US SEC is reviewing its approach to spot bitcoin ETFs following ‘court decisions’, the regulator’s head, Gary Gensler, commented. The agency is currently reviewing between eight and 12 such proposals, he said.

The SEC rejected a petition by exchange Coinbase to develop rules for the cryptocurrency industry. According to Gary Gensler, existing laws apply to the industry, and there is nothing that would indicate the need for new regulations.

Asset management companies Galaxy Digital and DWS Group, as well as Dutch market maker Flow Traders, are creating a subsidiary firm, AllUnity, which will issue a euro-denominated stablecoin.

One more Solana-based meme token, also featuring a dog, Bonk (BONK), rose 100% overnight after listing on Coinbase. Its capitalisation has already passed the $1.7 billion mark.

On Monday, the EUR/USD pair is demonstrating stability, trading around the 1.0910 mark.

Last week was notable for the currency markets, as key financial updates were released. The Federal Reserve and the European Central Bank maintained their interest rates at 5.50% and 4.50% per annum, respectively. In the U.S., retail sales in November saw a modest increase of 0.3% month-on-month, following a decline in the previous month. Industrial production also showed growth, albeit slightly below expectations at 0.2%, compared to the anticipated 0.3%. This was a slight rebound from October's decrease of 0.9%.

A significant development was the decline in the U.S. production PMI for December, which fell to 48.2 points, indicating potential concerns over high inflation levels.

With most critical data released, the currency market is now poised for a period of relative stability as it heads towards the Christmas season.

EUR/USD technical analysis

The EUR/USD H4 chart shows that the pair has established a consolidation range around 1.0888. Following an upward breakout, the price hit a local high of 1.1008 before correcting back to 1.0888 (testing from above). A new upward movement towards 1.1050 could initiate today. Upon reaching this level, a downward trend to 1.0727 may begin. The MACD indicator supports this view, with its signal line positioned above zero and pointing upwards.

On the EUR/USD H1 chart, the pair has finished its correction, bouncing off 1.0888. A rising structure is forming towards 1.0970, which could extend to 1.1050. Once this level is reached, a downward movement towards the first target of 1.0725 might ensue. This technical scenario is backed by the Stochastic oscillator, which shows its signal line above 80 and indicates potential further rises to new highs.

Japanese Yen is extending its broad-based pullback today. This movement appears to be a strategic response from traders lightening their positions in anticipation of the upcoming BoJ policy decision. Although a rate hike by the BoJ seems highly unlikely at this stage, there is speculation about potential adjustments in the central bank's communication. These changes are anticipated to lay the groundwork for concluding the yield curve control policy in January, followed by a possible rate hike in April to exit the prolonged phase of negative interest rates. However, given the BoJ's history of unexpected moves, traders are bracing themselves for substantial volatility, regardless of the decision made.

In other parts of the currency markets, US Dollar, Sterling, and Euro are displaying signs of weakness. Notably, Euro remains unfazed by the recent, worse-than-expected German Ifo business climate data. On the other end of the spectrum, New Zealand Dollar and the Australian Dollar are showing marked strength. Meanwhile, Swiss Franc and Canadian Dollar are exhibiting mixed performances.

One currency pair of particular interest is AUD/JPY, especially in the context of the upcoming RBA minutes in the Asian session, in addition to BoJ. From a technical standpoint, decisive break of 96.13 resistance, which is close to 55 D EMA, will argue that corrective fall from 98.56 is completed at 93.70, ahead of 93.00 support. This development would keep the rally from 86.04 intact, for further rise through 98.56 next. Nevertheless, rejection by 96.13 will likely resume the fall from 98.56, probably through 93.00 support, as reversing the rise from 96.04.

In Europe, at the time of writing, FTSE is up 0.65%. DAX is down -0.43%. CAC is down -0.35%. Germany 10-yaer yield is up 0.024 at 2.043. UK 10-year yield is up 0.001 at 3.690. Earlier in Asia, Nikkei fell -0.64%. Hong Kong HSI fell -0.97%. China Shanghai SSE fell -0.40%. Singapore Strait Times fell -0.11%. Japan 10-year JGB yield fell -0.0403 to 0.670.

Fed's Mester: The next phase is not when to reduce rates

In a Financial Times interview, Cleveland Fed President Loretta Mester put emphasis on the duration of maintaining restrictive monetary policy to ensure that inflation reliably returns to the 2% target. That's contrary to market expectations, which centers on timing and extent of rate cuts.

Mester's key statement, "The next phase is not when to reduce rates... It's about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%,"

"The markets are a little bit ahead. They jumped to the end part, which is 'We're going to normalize quickly', and I don't see that," she added.

When the discussion eventually shifts to the timing and pace of rate cuts, Mester highlighted the importance of one-year forward inflation expectations and their alignment towards the 2% target.

"If you don't take action as expected inflation comes down, then you're really firming policy," she warned. "You don't want to inadvertently become more restrictive than you think is appropriate."

ECB's Vasle cautions against premature rate cut expectations

ECB Governing Council member Bostjan Vasle expressed skepticism about market expectations for imminent interest rate cuts, considering them "premature," both in terms of timing and the overall scope of such moves. This perspective challenges the market's anticipation of monetary easing, which currently sees 50-50 chance of a rate cut by March, with a full cut expected by April

Vasle emphasized that the current market pricing "has lowered the level of restriction". Additionally, the accommodation priced into by interest rate expectations seems to be at odds with the monetary stance required to steer inflation back to the target.

Additionally, Vasle indicated that ECB would likely wait until at least the end of Q1 before considering any changes to its stance. This approach is grounded in the need for more comprehensive data, which will only be available around March or April. he added, "We will need to understand the underlying trends better, and we need the new projections, too."

On the inflation front, Vasle posited that inflation could rebound at the year's turn, potentially hovering between 2.5% to 3% through the first half of the next year. Vasle said, "So it's appropriate to wait and observe price growth through this period and reassess our outlook."

Germany's Ifo business climate dips to 86.4, economy remains weak

Germany' Ifo Business Climate fell from 87.3 to 86.4 in December, below expectation of 87.8. Current Assessment index fell from 89.4 to 88.5, below expectation of 89.5. Expectations index fell from 85.2 to 84.3, below expectation of 85.8.

By sector, manufacturing fell from -13.8 to -17.2. Services rose from -2.5 to -1.7. Trade fell from -22.2 to -26.6. Construction fell from -29.5 to -33.1.

The Ifo Institute's statement encapsulates the current sentiment, noting that "companies were less satisfied with their current business" and expressing a more skeptical view of the first half of 2024. The acknowledgment that "the German economy remains weak as the year draws to a close" is telling of the challenges facing Europe's largest economy.

NZ BNZ services rises to 51.2, maintains oscillating course

New Zealand BusinessNZ Performance of Services Index rose from 49.2 to 51.2 in November, crossing the threshold from contraction to expansion. However, it's crucial to note that this figure remains below the long-term average of 53.5, suggesting that recovery is still in its nascent stages.

Looking at more details, activity/sales rose from 47.5 to 48.7. Employment rose from 49.5 to 51.0. New orders/business rose from 52.1 to 52.3. Stocks/inventories jumped from 51.5 to 55.0. Supplier deliveries rose from 50.1 to 52.9.

BusinessNZ Chief Executive Kirk Hope's observation that the sector has been oscillating between contraction and expansion in recent months underscores the volatility and uncertainty still prevalent in the business environment.

The proportion of negative comments from businesses decreased from 58.2% in October to 54.0%. This reduction, though modest, is a positive sign, indicating a slight improvement in business sentiment. Hope added, "negative comments continued to be pinpointed on key areas such as the economy, inflation and cost of living".

New Zealand Westpac consumer confidence rises to 88.9 in Q4, encouraging sign

New Zealand Westpac Consumer Confidence Index rose notably from 80.2 to 88.9 in Q4, hitting the highest level in nearly two years. Present Conditions Index rose from 69.5 to 77.1. Expected Conditions Index also rose from 87.4 to 96.7.

However, Westpac noted that the index is still below historical average. This means "many more New Zealanders [are] feeling pessimistic about economic conditions." But it's important to recognize the positive trajectory reflected in these recent months. The rise in the Consumer Confidence Index is an "encouraging sign," as noted by Westpac.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 141.57; (P) 142.02; (R1) 142.61; More...

USD/JPY is still extending consolidation from 140.95 and intraday bias remains neutral. Stronger recovery cannot be ruled out. But upside should be limited well below 146.58 resistance to bring another decline. On the downside, break of 140.94 will resume the fall from 151.89 to next fibonacci level at 136.63.

In the bigger picture, fall from 151.89 is seen as the third leg of the corrective pattern from 151.93 (2022 high). Deeper decline would be seen to 61.8% retracement of 127.20 to 151.89 at 136.63, sustained break there will pave the way to 127.20 support (2022 low). This will now remain the favored as long as 146.58 resistance holds.

Economic Indicators Update

• BoJ to make rate announcement on Tuesday
• Fed’s Williams says no rate cuts planned

The Japanese yen is lower at the start of the week. In the European session, USD/JPY is trading at 142.77, up 0.44%.

The yen continues to power higher and surged 1.9% last week. It marked a fifth straight winning week for the yen, which has climbed 6.2% during that time. The yen strengthened to 140.95 on Friday, its highest level since July 31.

Will BoJ make a move?

Bank of Japan policy meetings have become must-see events, with investors on edge over speculation that the central bank is planning to tighten policy. Tuesday’s meeting will be closely watched, especially after hints from senior BoJ officials that it could phase out negative rates, which would be a sea-change in policy that would likely boost the yen. The BoJ might not announce any changes at the meeting, but I doubt that will quell speculation that a policy change is coming. The BoJ tends to hold its cards close to its chest, maximizing the surprise effect of any policy moves.

The BoJ has been an outlier among central banks in sticking to an ultra-loose policy while its peers were busy raising rates, and the BoJ is expected to tighten policy next year while other major central banks are looking to cut rates. The BoJ has long insisted that inflation is not sustainable, but that position has become difficult to defend, as inflation has remained above the 2% target month after month.

New York Fed President John Williams said on Friday that the Fed was not discussing rate cuts and that the Fed could tighten policy if inflation stalled or reversed directions. The markets don’t seem to be listening, however, and have priced in six rate cuts next year, starting as soon as March. At last week’s meeting, Fed Chair Jerome Powell finally jumped on the rate-cut bandwagon and said that the Fed would cut rates three times in 2024.

USD/JPY Technical

• USD/JPY is testing resistance at 142.61. Above, there is resistance at 143.06
• There is support at 142.02 and 141.57

Daily Pivots: (S1) 1.0855; (P) 1.0929; (R1) 1.0970; More...

Intraday bias in EUR/USD remains neutral at this point. Consolidation from 1.1016 could extend further and deeper retreat cannot be ruled out. But further rally is expected as long as 1.0722 support holds. On the upside, break of 1.1016 will resume the whole rise from 1.0447 to retest 1.1274 high.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is seen as the second leg. While further rally could cannot be ruled out, upside should be limited by 1.1274 to bring the third leg of the pattern. Meanwhile, sustained break of 1.0722 support will argue that the third leg has already started for 1.0447 and below.

Daily Pivots: (S1) 1.2638; (P) 1.2715; (R1) 1.2760; More...

Intraday bias in GBP/USD remains neutral as consolidation from 1.2793 is extending. While deeper retreat cannot be ruled out, outlook will stay cautiously bullish as long as 1.2499 support holds. On the upside, firm break of 1.2793 will resume the rally from 1.2036. Next target is 61.8% projection of 1.2068 to 1.2731 from 1.2499 at 1.2909.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to rise from 1.0351 (2022 low). Rise from 1.2036 is seen as the second leg that's in progress. Upside should be limited by 1.3141 to bring the third leg of the pattern. Meanwhile, break of 1.2499 support will argue that the third leg has already started for 38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075 again.

Daily Pivots: (S1) 0.8665; (P) 0.8689; (R1) 0.8726; More....

Intraday bias in USD/CHF remains neutral as consolidation from 0.8629 is in progress. Outlook remains bearish with 0.8819 resistance intact. On the downside, break of 0.8629 will resume larger fall from 0.9243 to retest 0.8551 key support next. On the upside, however, firm break of 0.8819 will turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.8551 are currently seen as a corrective pattern to the decline from 1.0146 (2022 high). Fall from 0.9243 is seen as the second leg for now. Strong support should be seen 0.8551 to bring rebound. Meanwhile, break of 0.9111 resistance will argue that the third leg has started already, and target 0.9243.