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GBP/JPY's rebound from 188.07 extended higher last week and the development argues that corrective pattern from 188.07 is extending with another rising level. Initial bias is neutral this week for some consolidations below 194.98 temporary top. Above there will extend the rise to 199.79 resistance. However, break of 192.35 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.

In the longer term picture, considering bearish divergence condition in W MACD, 208.09 is at least a medium term top. It's still early to conclude that the up trend from 122.75 (2016 low) has completed. But it's at least in a medium term corrective phase, with risk of correction to 55 M EMA (now at 172.51).

EUR/JPY's rebound from 156.16 extended higher last week and the development dampened the original bearish view. Sideway pattern from 154.40 might still be in progress, and is extending with another rising leg. Initial bias is mildly on the upside this week. Sustained break of 55 D EMA (now at 161.69) will pave the way to 166.67 resistance. On the downside, break of 159.09 support will turn bias back to the downside for 156.16 support 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.

In the long term picture, considering bearish divergence condition in W MACD, 175.41 is at least a medium term top. It's still early to conclude that up trend from 94.11 (2012 low) has completed. But a medium term corrective phase is in progress with risk of deeper fall back to 55 M EMA (now at 147.55).

Despite initial dip to 0.8224, EUR/GBP staged a strong rebound ahead of 0.8201 key support. Considering bullish convergence condition in 4H MACD, a short term bottom could at least be formed. Initial bias stays on the upside this week for 38.2% retracement of 0.8624 to 0.8224 at 0.8377. Firm break there will target 61.8% retracement at 0.8471, even as a corrective move. On the downside, break of 0.8271 support will bring retest of 0.8224 low instead.

In the bigger picture, focus is now on whether 0.8201 key support (2022 low) is strong enough to complete the whole down trend from 0.9267 (2022 high). In any case, medium term outlook will be neutral at best until decisive break of 0.8624 key resistance. Otherwise, risk will stay on the downside even in case of strong rebound.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's rally from 1.5963 extend further to 1.6573 last week but failed to break through 1.6598 resistance and turned sideway. Initial bias remains neutral this week first, and further rally is in favor. On the upside, decisive break of 1.6598 resistance should confirm that whole fall from 1.7180 has complete with three waves down to 1.5963. Further rise should then be seen to retest 1.7180 next. Nevertheless, sustained break of 1.6359 will indicate rejection by 1.6598, and turn bias back to the downside.

In the bigger picture, EUR/AUD is holding on to 1.5996 key support despite brief breach. Larger up trend from 1.4281 (2022 low) is still in favor to resume through 1.7180 at a later stage. Nevertheless, sustained break of 1.5995 will indicate that such up trend has completed. Deeper decline would be seen to 61.8% retracement of 1.4281 to 1.7180 at 1.5388, even as a correction.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6047) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF's strong rally and decisive break of 0.9434 resistance last week confirmed resumption of the rebound from 0.9204. Initial bias stays on the upside this week for 100% projection of 0.9204 to 0.9343 from 0.9254 at 0.9393. Decisive break there could prompt upside acceleration through 0.9444 resistance to 161.8% projection at 0.9479. On the downside, below 0.9335 minor support will turn intraday bias neutral first. But further rally will remain in favor as long as 0.9254 support holds.

In the bigger picture, the break of 55 D EMA (now at 0.9359) suggests that a medium term bottom might be in place already. Strong rise could be seen 38.2% retracement of 0.9928 to 0.9204 at 0.9481. Reaction from there would reveal whether rebound from 0.9204 is merely a corrective rise, or reversing the down trend from 0.9928.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Corrective pattern from 0.9407 (2022 low) might have completed with three waves to 0.9928. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption to 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. For now, outlook will stay bearish as long as 0.9928 resistance holds, even in case of strong rebound.

Canadian Highlights

• The Bank of Canada lowered its policy rate by 50 bps to 3.25%. This is the second straight upsized cut to interest rates, and marks a cumulative 175 bps of easing since the Bank first lowered rates in June.
• There are more cuts to come in 2025, but the Bank’s forward-looking comments signaled greater uncertainty over the path for interest rates.
• Canadian household wealth continues to rise, bolstering our view that consumer spending will firm up over the coming quarters.

U.S. Highlights

• November CPI inflation provided further evidence that progress on the inflation front has stalled.
• The FOMC is expected to cut its policy rate by another 25 bps next week and simultaneously hint towards a potential ‘pause’ in January to better assess recent inflation dynamics.
• The FOMC will also release a revised set of economic projections, which will shed some light on how Committee members’ views have shifted post-election.

Canada – No More 50s in ‘25

It was the Bank of Canada’s (BoC) turn to take center stage this week and markets got the show they wanted. The Bank cut its policy rate by 50 bps to 3.25%–the second consecutive supersized cut. The BoC has now reduced the overnight rate by 175 bps since June (Chart 1). The decision met consensus expectations, but market moves over the week were choppy. The Canadian dollar appreciated almost half a percent immediately post-meeting but ended up losing ground, finishing the week at 0.7030 U.S. cents. Yields marched higher, with the Canadian 2 and 10-year bonds up 10 and 15 bps, respectively.

There is a lot to unpack in this announcement. The BoC has made it clear that the economy no longer needs to be clearly in restrictive territory. And with the Bank’s range for the neutral rate currently at 2.25–3.25%, the policy rate in the eyes of the BoC is in now in more balanced territory. The Bank feels that inflation is stabilizing around their two percent target and has now shifted towards prioritizing the softer growth outlook.

There was one key change in the statement that injected uncertainty about the path forward for interest rates. In October, the Bank stated that they “expect” to reduce borrowing costs if the economy evolves broadly in line with their forecasts. This week, that changed to, “going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.” It’s a meaningful shift in tone and one that all but takes another 50 bps move off the table.

The BoC acknowledged the host of domestic and external uncertainties facing Canada’s economy in 2025. For one, U.S. President-elect Donald Trump’s threat to place 25% tariffs on Canadian goods exports severely clouds the economic outlook. Meanwhile, recent immigration policy changes will stall Canada’s population growth inducing both demand and supply effects. A wave of fiscal stimulus including one-time payments to individuals and a temporary suspension of the GST also have the potential to reignite consumer spending channels. In fact, our recent forecast has consumer spending as one of the key drivers of 2025 real GDP growth (Chart 2). An update on Canadian household balance sheets this week also showed that wealth continues to rise, bolstering our view that spending should continue to firm in the near-term.

As discussed in our recent forecast, we expect the BoC to cut another 100 bps–or one 25 bps cut per quarter–in 2025 to reach our estimate of the “neutral” rate by 2.25%. There is little doubt that elevated interest rates did their part in taking heat out of the economy. We think a gradual pace of further cuts is the prudent decision to allow the economy to slowly close economic slack, while minimizing the risk of reigniting inflation. The BoC has is navigating a tough stretch ahead as it aims to balance many competing forces in an effort to properly calibrate interest rates.

U.S. – December Cut Expected, January ‘Pause’ Increasingly Likely

For a year that was supposed to eke out only modest equity gains, the S&P 500 is up an impressive 27% year-to-date (Chart 1). The return is even more notable given that the Federal Reserve has so far delivered on only 75-bps of policy easing, or considerably less than the 150-bps priced by futures markets for 2024 at the end of last year. And even though another quarter-point cut is universally expected next Wednesday CPI and PPI data out this week provided more evidence that progress on the inflation front is indeed stalling and will likely lead to a more gradual path of policy easing in 2025.

Headline CPI inflation accelerated by its fastest pace in seven months in November, pushing the twelve-month change to 2.7%, up from its three-year low of 2.4% in October. Meanwhile, core inflation rose at a similar pace to the prior three-months, though the composition of price pressures shifted somewhat. Services inflation cooled last month, owing to a notable deceleration in shelter costs, but this was offset by a sharp uptick in goods prices and firm readings on ‘supercore’ inflation.

The Fed’s preferred inflation gauge, the core PCE deflator, is released next Friday. Mapping the CPI data into core PCE points to a ‘soft’ 0.3% m/m increase in November, pushing near-term trends higher (Chart 2). This is likely to unnerve FOMC members, who need to see further evidence of cooling inflationary pressures before committing to future rate cuts. This is a message that Fed Chair Powell is likely to telegraph at next week’s policy announcement.

The FOMC will also release a revised set of economic projections, which will provide insight on how policymaker’s view of the outlook and future path for the policy rate has shifted post-election. In the September projections, the median ‘dot’ assumed 100-bps of policy easing in 2025, or nearly double what’s currently reflected in futures pricing. However, core PCE inflation is running about 25 bps hotter than the 2.6% assumed in the last set of projections for the fourth quarter of this year. This suggests that the median dots for 2025 could shift a bit higher. But that’s by no means a guarantee, as each Committee member will make their own assumptions on scope, magnitude, and timing of potential policy changes under the incoming administration. This could very well lead to a wider dispersion in forecasts.

This is exactly what happened in December 2016, following the last Republican sweep. Transcripts from those FOMC meetings show that roughly half of the FOMC members incorporated some degree of fiscal stimulus in their individual forecasts. So even though Powell is unlikely to speculate on the impact of potential policy changes during next week’s press conference, it’s very likely that some FOMC members will have baked in some impacts from tariffs and/or tax cuts into their revised projections. Given the policy uncertainties and the fact that recent inflation readings have shown that progress has stalled, we suspect that the FOMC will open the door to a ‘pause’ on rate cuts in January and shift to cutting rates at every other meeting in 2025.

Monday, Dec 16, 2024

Tuesday, Dec 17, 2024

Wednesday, Dec 18 2024

Thursday, Dec 19, 2024

Friday, Dec 20, 2024

Summary

United States: Sticky Inflation, Sticky Wicket for the Fed

• Price data this week showed that inflation remains stubbornly above the FOMC's target. Overall inflation has trended sideways in recent months, and while we do not expect this week's data to prevent the Fed from cutting another 25 bps next week, it will likely contribute to the Committee dialing back its guidance for additional easing ahead.
• Next week: Retail Sales (Tue.), Industrial Production (Tue.), Personal Income and Spending (Fri.)

International: Center Stage for Foreign Central Banks This Week

• It was a very active week for foreign central banks. The European Central Bank cut rates 25 bps, and we view the dovish accompanying statement as consistent with steady easing at every meeting through next June. Meanwhile, the Swiss National Bank and Bank of Canada opted for more aggressive easing, with both delivering 50 bps rate cuts. On the flip side, Brazil's central bank announcement was very hawkish, as officials increased the Selic rate 100 bps and explicitly signaled same-sized increases at the next two policy meetings.
• Next week: Eurozone PMIs (Mon.), Bank of Japan Policy Rate (Thu.), Bank of England Policy Rate (Thu.)

Interest Rate Watch: A Year in Review for Rates: Exiting Inversion

• Coming into 2024, there was significant uncertainty about the path ahead for U.S. interest rates. Rate cuts from the FOMC have yielded lower short-term interest rates, but longer-term yields have risen this year amid reduced odds of a "hard landing" and rising estimates for r-star.

Credit Market Insights: Diverging Paths for HELOCs and Credit Cards

• Consumer spending has driven record-high credit card balances, while HELOC usage has plateaued despite falling borrowing rates. These trends suggest that consumers are still relying significantly on credit cards to support their spending habits.

Topic of the Week: If History Is Any Guide

• The 1930 Smoot-Hawley and 2017-2019 trade wars have taught us that countries are unlikely to stand down in the face of U.S. tariff increases. Who buys U.S. exports, and what goods are at risk?

Full report here.

• Markets had a volatile week, with US 100 (Nasdaq 100) reaching new highs and a strong likelihood of a Fed rate cut next week.
• Major central bank meetings dominate the week ahead.
• The BoJ faces a tough decision on whether to raise interest rates, with recent data supporting a hike.
• The US Dollar Index (DXY) is at a crucial resistance level, and its performance may be influenced by the Fed’s interest rate decision and outlook.

Week in Review: Uptick in US Inflation a Concern?

An interesting week that saw swings from risk off to risk on sentiment helping to push US Equities to fresh highs. A strong batch of US Data keeps the likelihood of a Fed Rate cut next week strong and languishing above the 90% threshold heading into the weekend.

Source: CME FedWatch Tool (click to enlarge)

Recent increases in both the US CPI and PPI data have raised eyebrows regarding resurgent inflation in 2025. This comes against the backdrop of proposed tariffs by incoming President Donald Trump. With that in mind however, many believe the US Dollar will strengthen due to this and it is a plausible scenario as Yields are also expected to rise.

The train of though around tariffs has been well discussed with ING Thinks James Knightley putting it “prices are going to rise, particularly if Trump’s tariff plans are as bold as promised on the campaign trail. And growth could rise in the short term. But timing is everything. If tariffs kick in early, and aren’t compensated for by big tax cuts, there’s going to be a real squeeze on household spending power.” I have to admit that i tend to agree with the narrative.

These concerns make the upcoming PCE data more important to the Fed as we head into 2025, with my base case being a December cut and January hold.

Wall Street Indexes were mixed this week with the Nasdaq 100 on course for a positive finish thanks in large part to chip stocks. The Nasdaq 100 is doing better than its Wall Street peers after Broadcom gave a positive outlook. This boosted excitement about artificial intelligence and helped raise the value of chip stocks dragging the index closer to the 22000 handle.

Wall Street indexes appear to be taking a break after recent gains and some strong economic data before the Fed’s meeting. This has put the S&P 500 and Dow on track for losses this week.

Source: LSEG (click to enlarge)

Oil prices recorded its first weekly gain in three weeks despite both OPEC and IEA downgrading their forecasts for both 2024 and 2025. Stimulus measures announced by China’s politburo for now though appear to be supporting Oil prices and keeping Brent above the crucial $70 a barrel mark.

The DXY enjoyed a positive week and as a result weighed on its G7 counterparts and many emerging market currencies as well. The early week US Dollar strength may in part have been down to haven appeal following events in Syria over the past two weeks. The DXY is languishing in a crucial area heading into a massive week and is likely to play a big role as the month and year draws to a close.

Gold prices enjoyed a strong start to the week thanks in part to renewed haven appeal and the resumption of Gold purchases by the Peoples Bank of China following a near six-month hiatus. However, the strong PPI data and potential profit taking on Gold ahead of a busy week have left the precious metal trading up just around 1% for the week at 2660 at the time of writing. A stark contrast from Thursdays highs around the 2720 and ounce handle. Any further signs of instability in Syria heading into next week could be crucial in the precious metals next move as well as the outlook by the US Federal Reserve moving forward into 2025.

The Week Ahead: Fed to Cut Rates, BoE Set to Hold as BOJ Face a Tough Choice

Asia Pacific Markets

The week ahead in the Asia Pacific region sees some key economic data releases and events.

In China, the final data report of the year will come out next Monday. Key economic indicators are expected to show modest improvement. Industrial production may grow by 5.6% compared to last year, retail sales are likely to speed up to 5.1% growth year-on-year, and fixed asset investment could stay steady with a small increase to 3.5% year-to-date.

Stimulus announcements by China last week adds another layer of intrigue around China. Market participants are hoping that the announcements over the past week will finally lead to a surge in demand.

In Japan, the Bank of Japan is meeting on Thursday. There are expectations for an interest rate hike next week, although it might be a close decision. Recent data, like strong wage growth, higher-than-expected inflation, and improved GDP figures, back the idea of a hike.

However, one local wire in Japan reported that there is a growing view that a premature rate hike should be avoided unless there is a significant risk of inflation rising. This may give the BoJ some food for thought.

Europe + UK + US

In developed markets, the focus moves back to Central Banks with both the Federal Reserve and the Bank of England (BoE) interest rate decisions.

The Federal Reserve is expected to reduce rates by another 25 basis points on December 18. Inflation hasn’t moved much closer to the Fed’s 2% target recently. However, the Fed also monitors the job market closely. Signs like slower job growth and rising unemployment support the decision to adjust rates closer to a neutral level. That said, the rate cuts are likely to slow down in 2025 unless inflation improves significantly or the job market weakens much more.

The Fed’s preferred inflation measure, the core PCE deflator, is expected to be around 0.2%, based on recent data from the CPI and PPI reports.

In Europe the week is a bit quieter with the biggest data release being PMI data. Given the struggle with growth the Euro Area is experiencing, this is a key release and one that could stoke volatility and the probability of potential rate cuts from the ECB. There is also a speech by Christine Lagarde at the start of the week which may shed more light on this past week’s rate cut.

In the UK we have a busy week with labor data kicking things off. The unemployment rate has been quite unpredictable due to well-known data issues. However, there are clear signs that the job market is slowing down. Despite this, wages haven’t been affected yet and might even rise slightly next week because of unusual comparisons with last year’s numbers.

Headline inflation is expected to increase more than the Bank of England predicted, partly due to a small rise in services inflation. This measure, which is important to the BoE, is likely to stay around 5% during the winter. This is mostly because of stubbornly high costs in areas like travel and rents, which the Bank doesn’t seem too concerned about.

The Bank of England (BoE) appears comfortable with reducing rates every other meeting. Since rates were cut in November, I don’t think there will be another cut before the February meeting.

Chart of the Week

This week’s focus is back to the US Dollar Index which is once again in the key area around the 107.00 handle.

I thought this may be a prudent time to look at the performance of the US Dollar post the 2016 US election for a historical perspective.

After both the 2016 and 2024 elections, stocks and the US dollar went up. However, in 2017, the dollar lost strength, entering a downward trend that lasted most of the year. This weakness in the dollar helped support a steady rise in U.S. and global stock markets.

Looking at where the US Dollar Index is currently resting in a key area of resistance. Will the recent uptick in inflation be a driving force for the US Dollar moving forward or will the Fed succeed in keeping things on an even keel?

The DXY has struggled to find acceptance above the 107.00 handle, will this time prove to be different?

A rejection here may lead to a retest of support at 106.50 and the 106.00 handle respectively.

A breach of 107.00 will need to prove that it has found acceptance above this level before i will be convinced of a sustainable move. The Fed interest rate meeting could be the catalyst for this especially if they taper rate cut expectations for 2025.

US Dollar Index (DXY) Daily Chart – December 13, 2024

Source: TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

• 106.50
• 106.00
• 105.00

Resistance

• 107.50
• 108.00
• 109.00

Canadian consumer price index growth is expected to have eased slightly in November after picking up in October, which is consistent with a persistently softening economy that’s left broader inflation pressures tracking at or below the Bank of Canada’s 2% target.

We expect headline inflation to have eased to 1.9% in November. Price growth in both food and energy inflation are expected to have held largely steady year-over-year at around 3% and -2.7%, respectively. But, we look for growth excluding those components to drop to 2.1% from 2.3% in October.

Shelter inflation still accounts for a disproportionate share of overall inflation, but should show further signs of slowing in November. Mortgage interest costs were still up almost 15% from a year ago in October, and accounted for over a quarter of annual consumer price growth. But, that is down from a 30% growth peak in 2023 and will continue to slow following interest rate cuts. Rent inflation also likely eased as a drop in current market asking rents flow through to lease renewals.

Annual growth in the BoC’s preferred “core” measures, such as CPI trim and median, are both expected to tick lower following a rise in October, averaging 2.5%. The breadth of inflation pressures remained relatively narrow in October even with readings picking up. That likely persisted in November.

Unlike Canada where inflation pressures have eased, a resilient U.S. economy has meant inflation has been stickier than previously expected. Headline U.S. inflation picked up slightly to 2.7% in November, while the U.S. Federal Reserve’s “supercore” measure held at an elevated 4.3% on a three-month annualized basis.

Those trends will be closely watched by the Fed, but shouldn’t prevent another interest rate cut on Wednesday. Chair Jerome Powell hinted in recent communications that the central bank doesn’t need to rush rate cuts, but labour markets have also been gradually softening and inflation is still lower than it was at the start of this year. The level of the Fed funds rate is still likely higher than it needs to be for inflation to continue to edge broadly toward the Fed’s 2% objective.

We continue to think the Fed will cut by 25 basis points in December and January before hitting a pause with the fed funds rate at a restrictive 4%-4.25% range. As we have highlighted before, a solid domestic demand backdrop, in no small part tied to a large government budget deficit, would need to be offset by tighter monetary policy.

Week ahead data watch

• We expect Canadian housing starts to grow by 10% in November, reaching 266K.
• October SEPH data will be watched closely for further signs of softening in the labour market. Given slower hiring demand, we expect job openings to weaken further and wage growth to slow.
• Canadian retail sales likely increased by 0.7% in October, in line with StatsCan’s preliminary estimate. Auto sales were up 1.7%, down from the 4.7% in September. Sales at gas station rebounded in October as prices rose.
• We expect U.S. retail sales to tick up again (+0.2%) in November, slowing from the 0.4% growth in October. Auto and gas station sales were both higher during that month.
• U.S. personal spending likely grew by 0.4% in November, matching the pace in October. We expect personal income to edge up by the same amount (+0.4%) as wage growth remained robust in the U.S.
• U.S. industrial production likely ticked higher in November, by 0.2%, supported growth in auto manufacturing.