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Key Highlights

• USD/JPY started a fresh increase above the 151.00 resistance zone.
• It cleared a key bearish trend line with resistance at 151.20 on the 4-hour chart.
• EUR/USD failed to recover above the 1.0620 level and trimmed some gains.
• Ethereum extended gains and might stabilize above the $4,000 level.

USD/JPY Technical Analysis

The US Dollar started a fresh increase from the 148.65 zone against the Japanese Yen. USD/JPY surpassed 150.50 and 151.00 to move into a short-term positive zone.

Looking at the 4-hour chart, the pair surpassed the 38.2% Fib retracement level of the downward move from the 156.75 swing high to the 148.64 low. It cleared a key bearish trend line with resistance at 151.20.

The bulls even pushed the pair above the 100 simple moving average (red, 4-hour) but they faced hurdles near the 200 simple moving average (green, 4-hour).

The 50% Fib retracement level of the downward move from the 156.75 swing high to the 148.64 low also acted as a resistance. On the upside, the pair could face resistance near the 152.70 level.

The first major resistance is near the 153.20 level. A close above the 153.20 level could set the tone for another increase. The next major resistance could be the 154.50 level, above which the price could climb higher toward the 155.00 resistance.

On the downside, immediate support sits near the 151.00 level. The next key support sits near the 150.50 level. Any more losses could send the pair toward the 150.00 level.

Looking at EUR/USD, there was no upside break above the 1.0620 resistance and the pair might now start another decline.

Upcoming Economic Events:

• US Import Price Index for Nov 2024 (MoM) – Forecast -0.2%, versus +0.3% previous.
• US Export Price Index for Nov 2024 (MoM) – Forecast -0.2%, versus +0.8% previous.

Short Term Elliott Wave view in GBPJPY shows decline from 10.30.2024 high ended at 188.14 as wave 1. The decline unfolded as a 5 waves diagonal Elliott Wave structure. Pair has turned higher in wave 2 to correct this 5 waves decline. The internal subdivision of wave 2 rally is unfolding as a zigzag Elliott Wave structure. Up from wave 1, wave i ended at 191.53 and wave ii ended at 190.3. Wave iii higher ended at 192.2, wave iv dips ended at 190.91, and final wave v higher ended at 192.37. This completed wave (i) in higher degree.

Pullback in wave (ii) ended at 190.58. Pair has rallied higher in wave (iii) towards 193.4 and pullback in wave (iv) ended at 192.44. Final leg wave (v) ended at 195 which completed wave ((a)) in higher degree. Pullback in wave ((b)) is in progress to correct cycle from 12.3.2024 low. Internal subdivision of the pullback is unfolding as a zigzag structure. Down from wave ((a)), wave (a) ended at 192.91. Expect wave (b) rally to fail below 195 and pair to turn lower in wave (c) to complete wave ((b)). Near term, as far as pivot at 188.14 stays intact, expect pullback to find buyers in 3, 7, 11 swing for more upside.

GBPJPY 60 Minutes Elliott Wave Chart

GBPJPY Elliott Wave Video

https://www.youtube.com/watch?v=yBmKBmnk8LM

• GBPUSD reversed from resistance level 1.2780
• Likely to fall to support level 1.2635

GBPUSD currency pair recently reversed down sharply from the resistance level 1.2780 (which reversed the price for the last 5 consecutive trading sessions) standing close to the 50% Fibonacci correction of the downward impulse from November.

The downward reversal from the resistance level 1.2780 started the active minor impulse wave 1, which belongs to the higher impulse wave (1).

Given the multi-month downtrend, GBPUSD currency pair can be expected to fall further to the next support level 1.2635 (low of the previous wave (B) from the end of November and the target for the completion of wave 1).

• GBPAUD reversed from resistance zone
• Likely to fall to support level 1.9800

GBPAUD currency pair recently reversed down sharply from the resistance area between the upper daily Bollinger Band, key resistance level 2.0045 (former multi-month high from April) and the resistance trendline of the wide daily up channel from October.

The downward reversal from this resistance zone created the daily Japanese candlesticks reversal pattern Shooting Star Doji.

Given the strength of the aforementioned resistance area and the overbought daily Stochastic, GBPAUD currency pair can be expected to fall further to the next support level 1.9800.

• The ECB decided to cut its three policy rates by 25bp, in line with market expectations. The most important decision taken today, though, was to remove the pledge to keep monetary policy restrictive. The ECB now simply guides that it will use the three-tiered reaction function inputs as key metrics (inflation outlook, underlying inflation and strength of monetary policy transmission) to set its policy rates.
• Markets didn’t take a specific cue from today’s press conference and continue to price 125bp of rate cuts in 2025.

Removing the hawkish bias

Today’s decision was not clear cut, in our view, as the ECB could have opted for a 50bp rate cut in light of the weak economic growth outlook. However, staff projections showing inflation at target made it conclude that a 25bp rate cut was sufficient.

The decision was a dovish 25bp rate cut though, and we assess the communication around it to be as close as possible to 50bp without delivering such a cut. Lagarde also said that there were deliberations about a 50bp rate cut today. Overall we found the language on growth, labour market and underlying inflation on the dovish side. In particular, we highlight that Lagarde said that the risk to inflation is now ‘clearly’ two-sided.

While Lagarde didn’t provide guidance on the end point of the rate cutting cycle, nor about the size of rate cuts at a particular point in time, the policy rate outlook is linked to the three-tiered reaction function (inflation, underlying inflation and transmission mechanism). Lagarde said they didn’t discuss the neutral rate level, but referenced the study from earlier this year that pointed to a range of neutral real rate between -0.5% and 0%, thus they will discuss once they come closer. She said that conventional wisdom suggests that the neutral rate is probably a little higher than before.

Lower growth in the staff projections and downside risks

Lagarde highlighted that the economy grew more than expected in Q3 mainly due to oneoffs from tourism. More importantly, she said that the economy is now losing momentum as manufacturing activity continues to decline and services growth is slowing down. The labour market remains solid, but she noted that vacancies are falling, and surveys point to less job creation.

The new staff projections were revised down across the entire forecast horizon on growth and see downside risks to the projections. GDP growth is now expected at 0.7% y/y in 2024 (from 0.8%), 1.1% in 2025 (from 1.3%), 1.4% in 2026 (from 1.5%). For the first time, the staff also projected 2027 growth, which is seen at 1.3%, in a sign of the ECB may be adjusting the potential growth in the euro area. The increase in growth next year is mainly driven by rising real incomes that will support consumption. Rising global demand will also help the economy in the absence of large trade disruption.

The disinflation process is well on track and inflation risks are “clearly two-sided”

In terms of inflation, the staff projections made a small downward revision to the headline forecast while the forecast for core inflation was left unchanged. Importantly, Lagarde noted that risks are “clearly two-sided”, which shows that the ECB is increasingly acknowledging that inflation could undershoot the target. Headline inflation is now expected at 2.4% y/y in 2024 (from: 2.5%), 2.1% y/y in 2025 (from: 2.2%), 1.9% y/y in 2026 (from: 1.9%) and 2.1% in 2027. The ECB said that the disinflation process is well on track and that most measures of underlying inflation suggest that inflation will settle at around the 2% target on a sustained basis. The new staff projections see core inflation at 2.9% in 2024, 2.3% in 2025, 1.9% in 2026, and 2.1% in 2027 like in September. The ECB notes that domestic inflation remains high, but that it is mostly due to wages and prices in certain sectors that are still adjusting to the past inflation surge with a significant delay. Hence, compared to earlier communications the ECB now clearly downplays the role of elevated domestic inflation and focuses more on forward looking measures, which is a dovish signal. She also highlighted lower market-based inflation measures. Another dovish communication on inflation was that Lagarde said that lower wage growth and higher productivity in staff projections means unit labour costs are expected to increase less than previously expected.

Summary

• We expect the FOMC will reduce the federal funds rate by 25 bps at the conclusion of its upcoming meeting on December 18 while simultaneously emphasizing that future rate cuts will be slower-going and dependent on incoming data.
• Data over the inter-meeting period suggest ongoing resilience within the U.S. economy. The labor market cooling remains contained while the last few inflation readings show a stubborn pace of price growth that remains about a percentage point above the central bank's 2% target.
• Fed policymakers have hinted that their base case remains a 25 bps cut for December. But, officials have also suggested that current policy is now at a place where further reductions could occur more slowly. Thus, we expect that after lowering the target range by 25 bps to 4.50%-4.75% in December, additional easing is likely to occur at an every-other-meeting pace.
• The quarterly update to the Summary of Economic Projections is likely to underscore the extent to which the U.S. economy has been stronger than expected in recent months. That said, projections for 2025 may be more dispersed than usual given that individual participants might assume different economic policy outcomes, such as higher tariffs, lower taxes or slower growth in the foreign-born labor force.
• We look for the median participant estimate of the fed funds rate at the end of 2025 to rise by 25 bps to 3.625%. However, we would not be shocked to see it increase 50 bps given the recent run of firm data and the possibility of some participants re-centering the risks to their forecasts in light of potential policy changes.
• FOMC participants' estimates of the long-run federal funds rate has been creeping higher over the past year, and we anticipate it will continue to do so with the median long-run dot rising to 3.0%.
• There is a chance that the FOMC will adopt a technical adjustment to the interest rate it pays on overnight repurchase agreements (ON RRPs). If so, then overnight interest rates may fall by a few more bps than the 25 bps decline that typically follows a reduction in the target range by a similar amount. More broadly, a tweak to the ON RRP rate would be yet another sign that quantitative tightening is nearing its conclusion.

FOMC Outlook: 25 bps on December 18 Before Pace of Easing Slows

We expect the FOMC will reduce the federal funds rate by 25 bps at its upcoming meeting on December 17–18 while simultaneously emphasizing that future rate cuts will be slower-going and data dependent. Economic data generally have come in hotter than expected since the FOMC started cutting rates at its September meeting. Nonfarm payroll growth rebounded in November to 227K, bouncing back from the weak 36K reading in October (revised up from 12K initially) and pushing the three-month moving average for job growth up to a respectable 173K per month. The unemployment rate ticked up to 4.2%, but it remains slightly below its recent peak of 4.3% in July (Figure 1). Real GDP grew at a sturdy 2.8% pace in Q3, and recent monthly data lead us to project that output will grow at a solid, albeit slower, pace of 2.1% in the current quarter.

The inflation data also have been a bit firmer over the past couple months. The core PCE deflator increased at a 2.8% annualized rate in the three months ending in October, up from a 2.4% annualized rate when the FOMC last met in November and a 2.2% rate when the Committee gathered in September. On a year-over-year basis, core PCE inflation has been sticky around 2.7%-2.9% in recent months (Figure 2). Headline inflation has been tamer on the back of falling gasoline prices, but the overall PCE deflator is still up 2.3% year-over-year—about 30 bps above the FOMC's 2% inflation target. The recently released CPI data for November suggest that progress in reducing inflation once again stalled out last month. The stronger economic data have coincided with a further easing in financial conditions. Major U.S. equity indices have risen to all-time highs, while credit spreads have tightened further in recent months.

Against this backdrop, the recent Republican sweep of Congress and the White House has led to significant uncertainty about the outlook for economic policy in 2025. A full review of the post-election policy outlook is beyond the purview of this report, and we would encourage our readers to check out our 2025 annual economic outlook report for further reading on this topic. That said, the FOMC likely will be weighing the prospects for fiscal policy expansion (e.g., tax cuts, more spending on border security and the military), fiscal policy contraction (spending cuts for nondefense areas) and significantly higher tariffs.

Chair Powell is unlikely to comment much on the outlook for these policy changes while they remain speculative, but we suspect the FOMC will have a robust internal debate about the impact of these potential policies on the economy. At the December 2016 FOMC meeting, which followed in the wake of the last Republican election sweep, the research staff at the Board presented analysis on the economic impact of hypothetical tax cuts. The transcripts from that meeting reveal that roughly half of the Committee members incorporated an assumption of greater fiscal policy stimulus into their Summary of Economic Projection submissions. Thus, even if Chair Powell's press conference remarks are noncommittal, we believe the FOMC's thinking will still be guided by prospective policy changes next year.1,2

Recent comments from Fed policymakers have hinted that their base case remains a 25 bps rate cut at the December meeting. Federal Reserve Governor Waller stated on December 2 that he "leans toward supporting a cut to the policy rate at our December meeting." John Williams, the president of the New York Fed, deferred on explicitly supporting a December rate cut but backed the notion that it will be appropriate to continue to reduce the federal funds rate over time. Federal Reserve Bank of San Francisco President Mary Daly, who will shift from a voter to a non-voter in 2025, also punted on an explicit commitment for the next FOMC meeting but reinforced the view that "we have to keep policy moving down to accommodate the economy." Beth Hammack, a voter as the president of the Federal Reserve Bank of Cleveland, remarked the Committee is likely "at or near" the point where a slower pace of reductions makes sense. Thus, even if policymakers opt to hold the federal funds rate steady on December 18, another reduction sometime in Q1 still strikes us as likely as the Committee transitions to an every-other-meeting pace of rate cuts.

While we expect an additional 25 bps point cut to the fed funds rate at the December meeting, the recent run of firmer data and the total amount of policy "recalibration" already undertaken point to further easing occurring at a more gradual pace in coming months. Few changes to the post-meeting statement's description of recent economic conditions seem necessary, and the characterization of the Committee's employment and inflation goals remaining "roughly in balance" is still reasonable, in our view. However, we anticipate that a rate cut on December 18 will be accompanied by an indication in the statement that there is a higher bar to subsequent policy easing and that future reductions in the target range for the federal funds rate will be undertaken more slowly. This policy guidance could be signaled, for example, by noting consideration for "any" or the "extent of" additional policy easing and/or emphasizing the cumulative amount of rate cuts since this summer.

Dots Headed Higher, but by How Much?

The December 17–18 FOMC meeting will include an update to the Committee's Summary of Economic Projections (SEP). The SEP was last updated at the September meeting, and those projections highlight the extent to which the U.S. economy has been stronger than expected over the past few months. The median participant in the September SEP expected the unemployment rate to average 4.4% in the current quarter. We expect this projection will drop to 4.2% based on the data we now have in hand. Similarly, the median participant expected real GDP growth of 2.0% this year, whereas we are currently tracking in the neighborhood of 2.4%. On the inflation front, the median participant projected 2.6% year-over-year growth in the core PCE deflator for 2024, while our current forecast is 2.9% with only a limited amount of price data left in the year.

Looking to next year and beyond, we expect the median projections for real GDP growth in 2025 and 2026 to move higher by a tenth or two to reflect this stronger momentum. We also believe the unemployment rate projections for the next few years likely will fall by a tenth or so. Similarly, we expect the inflation projections for 2025 and 2026 to rise by a tenth or two amid firmer price pressures of late. That said, there may be more dispersion in the economic projections than usual given that individual participants may assume different economic policy outcomes, such as higher tariffs, lower taxes or slower growth in the foreign-born labor force. The potential for significant non-monetary policy changes may also be evidenced by a shift in participants' assessments of uncertainty and risks around their economic projections.

In terms of the outlook for the federal funds rate, we think the median dot for 2025 will rise by 25 bps to 3.625%, although a 50 bps increase to 3.875% would not shock us. Our base case is that the median 2026 dot also will increase by 25 bps, bringing it to 3.125%. In the September dot plot, the 2027 median dot was in line with the "longer-run" dot, and we would expect that to still be the case in the upcoming projections. The "longer-run" median dot is currently 2.875%, and it has been creeping higher over the past year alongside estimates from private sector economists (Figure 3). We expect to see the longer-run dot rise to 3.0% in next week's update (Figure 4).

QT Update and Possible Technical Adjustment?

We expect the FOMC will once again reaffirm the ongoing pace of balance sheet runoff, more commonly known as quantitative tightening (QT). We believe the Committee will maintain the current monthly pace of balance sheet runoff, currently a maximum of $25 billion of Treasury securities and $35 billion of mortgage-backed securities (MBS), through the end of March. After that, we expect the central bank will maintain the size of its balance sheet for a couple of quarters such that it is flat in dollar terms but still declining as a share of GDP. We expect MBS runoff will continue and for pay-downs to be replaced one-for-one with Treasury securities as the Fed tries to further reduce the share of its security holdings that are mortgages. If our forecast is correct, then bank reserves will level off as a share of GDP around 10% (Figure 5).

There is a chance the Committee will adopt a technical adjustment to the interest rate it pays on overnight reverse repurchase agreements (ON RRPs). The Federal Reserve uses the ON RRP rate and the interest rate on reserve balances (IORB) to help keep short-term interest rates, most notably the federal funds rate, within the target range for the fed funds rate. Money market rates such as the Secured Overnight Financing Rate (SOFR) have drifted higher amid ongoing balance sheet runoff (Figure 6). This development presents the FOMC an opportunity to tweak the ON RRP rate by 5 bps to bring it in line with the bottom end of the target range for the fed funds rate, rather than being 5 bps above it as is currently the case. The primary advantage of such a move would be to put some modest downward pressure on money market rates, helping to keep them from drifting undesirably higher as QT continues to remove excess liquidity from the financial system.

The minutes from the November FOMC meeting revealed that the Fed staff provided an informational briefing to the Committee on this idea. That briefing does not necessarily mean the FOMC will follow through with such a move, but it is clearly a possibility at one of the next few meetings, including the one next week. If the FOMC brings the ON RRP rate in line with the bottom end of the fed funds target range, then overnight interest rates such as SOFR and the federal funds rate may fall by a few more bps than the 25 bps decline that typically follows a reduction in the target range by that amount. More broadly, a tweak to the ON RRP rate would be yet another sign that QT is nearing its conclusion.

Endnotes

1 – "Report to the FOMC on Economic Conditions and Monetary Policy," Federal Reserve Board, December 7, 2016.

2 – "Meeting of the Federal Open Market Committee on December 13-14, 2016," Federal Reserve Board, December 14, 2016.

• Gold has added almost 30% during 2024
• Fed policy could continue to impact the precious metal in 2025
• Geopolitical tensions tend to drive the safe haven higher
• 2025 could be another bright year for gold

A spectacular year for the precious metal

It’s been  a phenomenal year for gold, with prices rising by almost 30% and hitting numerous new all-time highs. Geopolitical uncertainties and the US presidential elections drove prices to a peak of $2,790 per ounce on October 30. On the other hand, gold prices experienced a dip when Donald Trump was re-elected, as uncertainty about a contested election decreased, and investors redirected their focus to the rising performance of the US dollar.

Impact of Trump's re-election

Donald Trump’s re-election and the subsequent reduction in market uncertainty led to a retreat in gold prices as investors shifted toward the strengthening US dollar. The precious metal may face a significant negative movement between $2,200-$2,600 through the end of the first quarter of 2025. Following Trump's recent victory, gold prices have seen a decline due to rising bond yields and a stronger US dollar, which make gold less appealing for investors. However, gold often serves as a safe-haven asset during times of uncertainty. If Trump's policies lead to increased geopolitical risks or economic instability, demand for gold could rise again as investors seek to protect their wealth.

Gold prices pulled back by more than 3% in November, representing their most significant monthly decline since September 2023. Apprehension that elevated tariffs under a forthcoming Donald Trump administration may result in sustained higher interest rates is the market’s biggest fear.

Federal Reserve's influence

The Federal Reserve's monetary policy will continue to have a significant impact on gold prices in 2025. If inflation in the US declines and the Fed cuts interest rates further as expected, this will reduce the opportunity cost of holding non-yielding assets, making them more attractive to investors. Additionally, lower interest rates can lead to a weaker US dollar, further boosting demand for gold as it becomes cheaper.

But persistent inflation and the Fed's response to it can also drive gold prices higher. If the Fed’s policy stance is seen as insufficient to curb inflation, investors may turn to the precious metal as a hedge against rising prices.

Most economists are concerned that President-elect Trump's proposed policies will lead to increased inflation, threatening to derail the Fed’s rate-cutting cycle.
Investors have already drastically scaled back their rate cut bets, slashing the odds in half, to about 75 basis points by the end of 2025, on the expectation of a spike in inflation from his proposed policies, which include increased tariffs and tax cuts.

Summary

• The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 3.00% at today's monetary policy announcement, and the accompanying statement was noticeably dovish in tone. In particular, the ECB's medium-term forecasts for underlying inflation were slightly below the 2% target, and the central bank removed its pledge to keep policy rates "sufficiently restrictive for as long as necessary” to return inflation to target.
• Overall, we view today's announcement as consistent with and supportive of our outlook for continued steady rate cuts from the European Central Bank. Our base case remains for 25 bps rate cuts in January, March, April and June, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. The announcement opens the door to a possible 50 bps rate cut during early 2025 if Eurozone growth and inflation were to prove especially weak.
• The Swiss National Bank (SNB) surprised market participants by delivering a 50 bps reduction in its policy rate to 0.50%, citing a decrease in underlying inflation pressures. Given the outlook for further ECB easing and the potential for upward pressure on the franc, we expect the Swiss National Bank to cut rates again by 25 bps to 0.25% in March.

European Central Bank Cuts Rates, Offers Dovish Guidance

The European Central Bank (ECB) lowered its Deposit Rate by 25 bps to 3.00% at today's monetary policy announcement, an outcome that was widely expected, and the ECB's accompanying statement was noticeably dovish in tone. Overall, we view today's dovish announcement as supporting our outlook for the ECB to cut rates at every meeting through June of next year, while also opening the door to a possible 50 bps rate cut during early 2025 if Eurozone growth and inflation were to prove especially weak.

Among the key elements of today's ECB statement:

• The disinflation process is seen as well on track, and the central bank removed its reference to an expected rise of inflation in the coming months.
• Domestic inflation has edged down but remains high, with wages and prices still adjusting to the past inflation surge with a substantial delay.
• The central bank lowered its projections for underlying inflation (CPI excluding food and energy) slightly. The ECB now sees underlying inflation at 2.9% in 2024 and 2.3% in 2025 (both unchanged), 1.9% in 2026 (previously 2.0%) and 1.9% in 2027.
• The ECB also lowered its GDP growth projections to 0.7% for 2024 (previously 0.8%), 1.1% for 2025 (previously 1.3%) and 1.3% for 2026 (previously 1.5%).

Perhaps most importantly, the ECB removed its reference to keeping “policy rates sufficiently restrictive for as long as necessary” to return inflation to its 2% medium-term target. Instead, the ECB simply said it “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance” and that it is “not pre-committing to a particular rate path.” That change in language represents a clearly dovish shift by ECB policymakers.

Overall, we view today's announcement as consistent with and supportive of our outlook for continued steady rate cuts from the European Central Bank. Our base case remains for 25 bps rate cuts in January, March, April and June, with a final 25 bps rate cut in September, for a terminal ECB policy rate of 1.75%. While we are not inclined to adjust that outlook at this time, we do view the ECB's slightly below-target medium-term inflation forecasts and removal of its pledge to keep monetary sufficiently restrictive as increasing the risk of a larger 50 bps rate cut some time in early 2025. Indeed, ECB President Lagarde said there was some discussion of a 50 bps rate cut at today's meeting, although the overall agreement was that a 25 bps rate cut was the right move.

If sentiment surveys soften further, economic growth is especially weak, or inflation especially benign, that could see policymakers opt for a larger rate cut at some point. ECB President Lagarde once again indicated that growth risks are tilted to the downside, and our own forecast for Eurozone GDP growth of 0.9% in 2025 is slightly below the ECB's projection. In terms in timing, we would view the risk of a 50 bps rate cut as more likely at the March rather than January monetary policy meeting. The March meeting will include fully updated economic projections, and give policymakers a chance to see a couple more inflation readings than the January announcement. as well as at least some early indications on fourth quarter wage developments.

Swiss National Bank Surprises With Aggressive Easing

Ahead of today's ECB decision, the Swiss National Bank (SNB) surprised market participants by delivering a 50 bps reduction in its policy rate to 0.50%, compared to the 25 bps reduction expected by the consensus. The SNB also said it remains willing to be active in the foreign exchange market as necessary.

In lowering interest rates, the central bank noted a decrease in underlying inflation pressures. With lower-than-expected food and energy inflation as well, the SNB lowered its CPI inflation projection for 2025 to 0.3% (previously 0.6%), while its inflation forecast for 2026 was little changed at 0.8% (previously 0.7%). Given the outlook for further ECB easing, and the potential for upward pressure on the Swiss franc, we expect the Swiss National Bank to cut rates by 25 bps to 0.25% in March. While further easing beyond that is possible, we view the central bank as hesitant, just yet, to return its policy rate to the zero interest rate threshold.

The Swiss franc is down on Thursday following the Swiss National Bank rate announcement. In the North American session, USD/CHF is trading at 0.8880, up 0.43% 80on the day at the time of writing.

Swiss National Bank chops by 50 basis points

Today’s Swiss National Bank meeting was live, with the market uncertain as whether the SNB would cut rates by 25 or 50 basis points. In the end, the central bank opted for a jumbo 50-bp cut, bringing the cash rate to 0.50%.

The driver for the today’s oversized cut was the November inflation report, which came in at -0.1% for a second straight month. Inflation hasn’t posted a gain in six months and the SNB is concerned that inflation could fall below the 0%-2% target.

The 50-bp cut marks the SNB’s biggest rate reduction in 10 years. In its statement, the Bank pointed to lower-than-expected inflation, risks over US economic policy and political uncertainty in Europe. The statement was somewhat dovish, noting that “the forecast for Switzerland, as for the global economy, is subject to significant uncertainty”.

Today’s rate cut marks the fourth reduction this year. The SNB has been aggressive in its easing cycle, with the twin goals of avoiding deflation and combating the Swiss franc’s appreciation. The SNB does not want a highly-valued Swiss franc as this hurts the critical export sector. The central bank implemented a negative rate policy until mid-2022 and the SNB has not ruled out a return to negative rates. After the meeting, SNB President Martin Schlegel said that today’s 50-bp cut had reduced the probability of negative rates.

The SNB also released its updated inflation forecast at today’s meeting. The September inflation report was revised downwards, with a forecast of 1.1% in 2024 and 0.3% in 2025.

USD/CHF Technical

• USD/CHF has pushed above resistance at 0.8860 and is testing resistance at 0.8879. Above, there is resistance at 0.8903
• 0.8836 and 0.8817 are the next support levels