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In focus today

In the afternoon, US November retail sales and industrial production are due for release. Leading soft indicators gave very conflicting signals in November, so the Fed will closely follow hard data releases for stronger conviction on the direction of the economy.

In Germany, we receive two growth and sentiment indicators from Ifo and ZEW. It will be interesting to see if they show the same development as the PMIs yesterday, where the German composite index rose to 47.8 from 47.5, giving some relief on the current economic situation.

In the UK, we get the labour market data for October/November where focus is on developments in wage growth, particularly in the private sector.

Economic and market news

What happened yesterday

Norges Bank yesterday announced an important change to the way it will control its balance. Starting in March 2025, Norges Bank will cap the size of its FX reserve by selling foreign exchange and buying Norwegian kroner. The purpose is to limit the rise in central bank reserves as Norges Bank's seigniorage over time otherwise would have transmitted from a higher capital to higher bank reserves. A decision on the matter has been long-awaited, and while yesterday's market reaction was limited there are still diverging views as to what the full market impact will be in 2025.

In Germany, Chancellor Olaf Scholz lost the no-confidence vote in the German parliament. PM Scholz from the SPD had called for a vote-of-confidence for the government after he dismissed his Minister of Finance from the FDP back in November. As expected, Scholz lost the vote of confidence and can now ask the German president to dissolve the parliament and call for a general election. The election is expected to be held on 23 February 2025. Currently there is no clear majority in the polls, and a new coalition government is the most likely outcome of the election.

Euro area PMIs rose more than expected in December recovering some of the large decline in November, with the composite PMI rising to 51.4 from 49.5 (cons: 49.5). The manufacturing PMI stood unchanged at 45.2 while services PMI rose more than expected to 51.4 from 49.5 (cons:49.5). Hence, the data in December shows that the services sector continues to make up for the declining activity in the industry. With the average composite PMI lower than in Q3 the data supports our view of a contraction in the economy in Q4 with GDP growth at -0.1% q/q driven by the industry. The sub-component on services prices rose to the highest level since August with both input and output sub-indexes ticking higher in December showing that there is still a modest pressure on services prices. The euro area employment PMI subcomponent declined in December, showing that the labour market is gradually cooling and supports our expectations for slightly higher unemployment in the coming year.

UK PMIs for December mirrored those from the euro area with stronger than expected services and a decline in manufacturing, recovering some of the decline we saw in November. The service sector continues to hold up the economy with an increase in private sector output offsetting a downturn in manufacturing production. Price indices higher across the board indicating some continuous stickiness in price setting, a key concern for the Bank of England. On the other hand, the employment indicator came in weak at 45.2 in services and 49.3 in manufacturing, which points to accelerated cooling in the labour market.

In the US, the PMIs painted a mixed picture with manufacturing plunging further below 50 (48.3; from 49.7), yet services growth accelerating more than expected (58.5; from 56.1). The release was positive from an inflation perspective with both services input and output price indices continuing to decline despite solid growth in both business activity and new orders. Services are the most important driver of current inflation, and according to PMI, output price pressures should continue stabilizing towards pre-pandemic levels. On the other hand, manufacturing input costs continued trending higher. Goods inflation has been less of a problem for the past couple years though.

Equities: Global equities were higher yesterday, with a new all-time high in the Nasdaq index. However, this was yet again a very narrowly led market, particularly in the US, where cyclical large-cap growth stocks, specifically in the tech, consumer discretionary, and communication services sectors, made the gains. In the US yesterday, we had more industries lower than higher yesterday, and it marked the 11th consecutive trading session where more than half of the constituents in the S&P 500 were lower. While we are fundamentally positive on equities, we must admit that narrow leadership is not a fundamental driver but more a result of late cycle animal spirit, and in similar previous occasions, it has ended in badly. In the US yesterday, Dow -0.3%, S&P 500 +0.4%, Nasdaq +1.2%, and Russell 2000 +0.6%. This morning, Asian markets are broadly lower, together with futures in both Europe and the US.

FI: There were modest movements in global bond yields yesterday and a downgrade of France from Moody's had modest impact on the French government bonds yesterday. Initially, the 10Y OAT-Bund spread widened some 5bp, but at the end of the day the spread moved just 1-2bp. The French central bank has cut their growth forecast for the French economy and looking at the other rating agencies Fitch has been stating that without a credible plan for the budget in coming years there is significant risk to the rating. Thus, we expect to see more pressure on French government bonds given the political uncertainty.

FX: EUR/USD remains rangebound, fluctuating around the 1.05 mark as attention shifts to tomorrow's FOMC meeting. EUR/GBP erased recent gains during yesterday's session following the UK flash PMIs for December showing continued stickiness in price setting. In China, the continued need for policy easing keeps the upward pressure on USD/CNY intact and we saw a move yesterday from 7.275 to 7.285. EUR/SEK is steady around 11.45 this morning after it dropped ten figures yesterday and thus left the last week's range above 11.50. This move rhymes with the post-PPM December seasonality and our repetitive call for a tactical downside potential after the cross has been trading in more and less stretched overbought territory since the peaks in early November. We keep our 1M target at 11.30. Yesterday we got the long awaited announcement from Norges Bank on how they will handle the rise in structural liquidity in the coming years. The market reaction was non-existent, which we think makes sense for NOK FX spot given the relatively small amounts. Meanwhile, NOK/SEK took a one-figure hit, down from 0.9870 to 0.9770.

Key Highlights

• Bitcoin price started a fresh rally and traded to a new all-time high at $107,643.
• BTC cleared a connecting bearish trend line with resistance at $101,500 on the 4-hour chart.
• Ethereum price seems to be facing hurdles near the $4,000 zone.
• XRP is consolidating gains above the $2.20 support zone.

Bitcoin Price Technical Analysis

Bitcoin price remained supported above the $95,000 level. BTC/USD formed a base and started a fresh surge above the $98,000 and $102,000 resistance levels.

Looking at the 4-hour chart, the price settled above the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour). It even cleared a connecting bearish trend line with resistance at $101,500.

The price surpassed $104,000 and traded to a new all-time high at $107,643 on TitanFX. The price is now consolidating gains above the 23.6% Fib retracement level of the upward move from the $93,430 swing low to the $107,643 high.

Immediate support is near the $105,500 level. The next key support sits at $104,000. A downside break below $104,000 might send Bitcoin toward the $102,000 support. Any more losses might send the price toward the $100,000 support zone or the 50% Fib retracement level of the upward move from the $93,430 swing low to the $107,643 high.

On the upside, the price could face resistance near the $107,500 level. The next key resistance is $108,800. The main hurdle is now near $112,000.

A successful close above $112,000 might start another steady increase. In the stated case, the price may perhaps rise toward the $120,000 milestone level.

Looking at Ethereum, the bulls pumped the price above the $3,880 and $3,920 levels before the bears took a stand near the $4,000 zone.

Today’s Economic Releases

• US Retail Sales for Nov 2024 (MoM) – Forecast +0.5%, versus +0.4% previous.

Short Term Elliott Wave View in DAX suggests cycle from 8.5.2024 low is in progress as a 5 waves impulse structure. Up from 8.5.2024 low, wave 1 ended at 19674.68 and pullback in wave 2 ended at 18812.53. Index has resumed higher in wave 3. Up from wave 2, wave ((i)) ended at 19198.74 and dips in wave ((ii)) ended at 18900.02. Index then resumes higher in wave ((iii)). Up from wave ((ii)), wave (i) ended at 19272.99 and pullback in wave (ii) ended at 19036.41. Wave (iii) higher ended at 20425.86 and pullback in wave (iv) ended at 20370.23. Final leg wave (v) ended at 20461.85 which completed wave ((iii)).

Pullback in wave ((iv)) ended at 20277.63. Up from there, wave (i) ended at 20393.86 and wave (ii) ended at 20292.86. Wave (iii) higher ended at 20453.44 and pullback in wave (iv) ended at 20393.24. Final leg wave (v) ended at 20522.82 which completed wave ((v)) of 3. Wave 4 pullback is now in progress to correct cycle from 11.19.2024 low in 3, 7, or 11 swing before it resumes higher again. Down from wave 3, wave ((a)) should end soon, then it should rally in wave ((b)) before turning lower again in wave ((c)). Wave 4 typically ends around 23.6 – 38.2% retracement of wave 3. This area comes at 19870.5 – 20120.5.

DAX 60 Minutes Elliott Wave Chart

DAX Elliott Wave Video

https://www.youtube.com/watch?v=vHA8Xg9sJ8A

European Central Bank (ECB) President Christine Lagarde has signaled that more interest rate cuts may be coming if upcoming inflation data matches expectations. Speaking at the Bank of Lithuania, Lagarde mentioned that the eurozone is nearing its 2% inflation target and hinted at further easing if the current trends continue. The ECB recently reduced interest rates for the third time in a row, bringing the deposit rate down to 3% from its peak of 4% as inflation cools and economic growth slows.

Inflation in the eurozone dropped to 2.3% in November, down from over 10% last year, and is projected to fall further in the coming years. However, Lagarde cautioned that geopolitical events and potential U.S. trade policies, such as tariffs promised by Donald Trump, could impact eurozone growth and energy costs. The ECB’s next interest rate decision is scheduled for January 30, shortly after Trump’s inauguration.

EURCAD – D1 Timeframe

On the daily timeframe chart of EURCAD, a few striking technical factors intertwine: the SBR (Sweep-Break-Retest) pattern, resistance trendline, and Fibonacci retracement levels. Since the most recent impulse created a new low, it sets the tone for a bearish sentiment afterward.

EURCAD – H4 Timeframe

In the 4-hour timeframe, the SBR pattern takes on the form of a head-and-shoulders pattern, with the right shoulder expected to be around the 88% Fibonacci retracement level. The resistance trendline will also be pivotal to the final outcome of this projection.

Analyst’s Expectations:

• Direction: Bearish
• Target: 1.46569
• Invalidation: 1.51743

The Bank of England (BoE) faces a tricky balancing act as it prepares for its next policy decision. While the British economy has shown signs of contraction—shrinking by 0.1% for the second consecutive month—the latest BoE/Ipsos inflation expectations survey highlights a rise in public inflation concerns. Average inflation expectations for the coming year have increased to 3%, up from 2.7% in August 2024, while long-term expectations (over five years) have climbed to 3.4%, compared to 3.2% in the previous survey.

Rising inflation expectations are critical for policymakers because public perception of future inflation can influence current spending behavior. If people believe prices will rise, they may spend more now, driving up demand and fueling actual inflation further—a self-reinforcing cycle.

Despite these inflation concerns, the BoE faces mounting pressure to cut interest rates in 2025, with markets anticipating three to four rate reductions. The move aims to stimulate economic growth in a slowing economy, but inflation risks limit how aggressively the central bank can act.

The BoE's announcement this week will need to carefully balance these conflicting dynamics—addressing inflation concerns without further stifling economic recovery.

GBPJPY – D1 Timeframe

The downward slope of the resistance trendline on the daily timeframe chart of GBPJPY indicates that the current trend is bearish. Following the market structure, the price recently broke below the previous low, with the supply zone a few pips from the current price. Now, we can check if the lower timeframe aligns with the bearish sentiment.

GBPJPY – H4 Timeframe

Plotting a Fibonacci retracement of the recent bearish impulse, we see that the critical zone rests between 196.110 and 197.390. Considering the SBR pattern formed, the 76% Fibonacci retracement level, trendline resistance, and the rally-base drop supply zone, the sentiment leans heavily towards a bearish outcome.

Analyst's Expectations:

• Direction: Bearish
• Target: 189.971
• Invalidation: 198.700

AUDUSD reversed from support zone
• Likely to rise to resistance level 0.6400

AUDUSD currency pair recently reversed up from the support area set between the strong support level 0.6350 (which has been reversing the price from 2023, lower border of the weekly sideways price range) and the lower weekly Bollinger Band.

The upward reversal from the support zone stopped the previous impulse waves 3 and (3).

Given the oversold weekly Stochastic and the strength of the support level 0.6350, AUDUSD currency pair can be expected to rise further to the next resistance level 0.6400.

•  USDCAD reversed from support zone
• Likely to rise to resistance level 1.4300.

USDCAD currency pair recently reversed up pivotal support level 1.4140, former resistance level which reversed the price sharply at the end of November.

The upward reversal from the support level 1.4140 started the active impulse wave 5 of the higher order impulse wave (3) from September.

Given the clear daily uptrend, USDCAD currency pair can be expected to rise further to the next resistance level 1.4300.

• We expect the Bank of England (BoE) to keep the Bank Rate unchanged at 4.75% on Thursday 19 December in line with consensus and market pricing.
• Data has broadly been in line with the BoE's expectations, warranting a continued signalling of only a gradual approach to monetary policy easing.
• We expect the reaction in EUR/GBP to be rather muted with risks tilted to the topside.

We expect the Bank of England (BoE) to keep the Bank Rate unchanged at 4.75% on Thursday 19 December in line with consensus and market pricing. We expect the vote split to be 8-1 with the majority voting for an unchanged decision and Dhingra voting for a 25bp cut. Note, this meeting will not include updated projections nor a press conference following the release of the statement.

Since the last monetary policy decision in November, data has broadly been in line with the MPCs November forecasts. Headline inflation has been slightly stronger than expected but importantly service inflation was in line with expectations. Similarly, private sector wage growth matched expectations printing at 4.8% y/y in the three months to September but with more apparent loosening evident in the labour market. While the disinflationary process is broadly on track, topside risks are evident in the latest PMI surveys only further amplified by the expansionary fiscal stance. Growth has been slightly weaker than expected in Q3 and with downside risks to the Q4 growth outlook. We note that we will receive a string of key data releases just ahead of the meeting on Thursday. The labour market report for October/November is published on Tuesday 17 December and November inflation data the day prior to the meeting on Wednesday 18 December. While we do not expect the incoming data this week to move the needle for the December meeting it will likely prove pivotal in terms of the monetary policy outlook in 2025.

BoE call. In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we pencil in a slow-down in the easing pace to only quarterly cuts. This leaves the Bank Rate at 3.25% by YE 2025, which is lower than markets are expecting. We do however see the risk of the only gradual approach continuing in Q1 with a pause at the March meeting. Until data sufficiently warrants it, we think the BoE will be on steady course pausing at the meeting this week with service inflation and wage growth still elevated.

FX. We expect the market reaction to be rather muted upon announcement, barring any notable surprise in CPI on Wednesday altering the guidance. On balance, we tilt towards a dovish twist, which does suggest some slight EUR/GBP topside following the release of the statement. More broadly, we expect EUR/GBP to move lower in the coming quarters driven by BoE lagging peers in an easing cycle for the time being, UK economic outperformance and tight credit spreads. The key risk is more forceful policy easing from the BoE.

Summary

With China particularly sensitive to changes in U.S. trade and tariff policy, we find value in laying out scenarios for how China's economy and currency could evolve going forward. In this report, we outline the policy assumptions underpinning our base case for China GDP growth and the renminbi. We also offer views on how China's economy and currency could perform in a more hostile and retaliatory trade war, but also in a scenario where the U.S. and China reach a more benign “Phase 2” trade deal.