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In focus today

In Norway, the Regional Survey is due for release. We expect it to confirm that growth continues to rise at a moderate pace, with capacity utilization largely unchanged and indicate that the level of activity is somewhat below normal. Specifically, we expect that respondents in the survey will expect 0.3-0.4% growth next quarter, that capacity utilization will be unchanged at 35% and that the number of companies experiencing labour shortages will fall from 25% to 24%.

In Sweden, the final figures for November inflation are being published. The preliminary figures surprised to the downside, with CPI at 0.3% y/y, CPIF 2.3% y/y, and CPIF ex. energy 2.4% y/y. As preliminary estimates are generally reliable, significant revisions are unlikely. It will be interesting to analyse the details to understand the factors behind the surprise. Specifically, whether the low outcome is linked to seasonal variations or other underlying causes.

In central bank space, attention turns to the Swiss National Bank, where we forecast the rate to remain unchanged at 0.00%. The Central Bank of Turkey is also set to release its rate decision.

Economic and market news

What happened yesterday

In the US, the Federal Reserve cut its policy rate target by 25bp to 3.50-3.75% last night, as widely anticipated. Miran voted for a larger 50bp cut, while Schmid and Goolsbee dissented in favour of a hold, also in line with our expectations. We (and the markets) had expected Powell to push back against market pricing further rate cuts for 2026. However, his avoidance of strong forward guidance led to a decline in UST yields and broad USD weakening during the press conference. We maintain our Fed call and expect two final rate cuts in March and June. The Fed also announced reserve management purchases of T-bills starting 12 December at USD 40bn per month, indicating more front-loaded easing to liquidity policies than we anticipated.

Ahead of the meeting, the US Q3 Employment Cost Index signalled slightly slower-than-expected wage growth at 0.8% q/q (prior: 1.0%). This pace is close to ideal for the Fed - supporting consumption without driving inflation - and is positive for overall risk sentiment.

In Sweden, October economic activity data showed a slight decline, with lower production in the business sector as well as declining household consumption. The GDP indicator fell by 0.3% m/m, though its volatility warrants cautious interpretation. Overall, the data aligned with our expectations of slower growth for Q4, reflecting lagged effects of the summer slowdown, and does not alter the positive outlook heading into 2026.

In Norway, November core inflation declined to 3.0% y/y (cons: 3.1%, prior: 3.0%), driven by domestic and imported goods ex. food. Annual growth in household appliances and electronics dropped close to September levels, indicating that volatility was likely influenced by Black week adjustments. The print is marginally lower than Norges Bank's estimate from the September MPR at 3.1%, reinforcing the disinflationary trend. While this is unlikely to affect Norges Bank's rate path next week, it provides scope for signalling a more aggressive cutting cycle, dependent on the Regional Network survey today.

In Canada, the Bank of Canada kept the rate unchanged at 2.25% as widely expected.

In Denmark, November inflation held steady at 2.1% y/y. Food prices declined 0.9% from October, which could potentially have a positive impact on consumer sentiment.

Equities: Equity investors cheered the not-so-hawkish Fed cut yesterday. S&P 500 jumped 1% at the press conference, eventually closing 0.7% higher and small cap Russell 2000 1.3% higher. The rate decision triggered a clear cyclical preference in markets: Value cyclicals like materials, industrials, and consumer discretionary were all ~2% higher. This is interesting. Previously this year we have seen cyclical growth stocks - mag 7, basically - rallying at dovish surprises. This time, it was more of a "run it hot" reaction in markets, where expectations of stronger macro fuelled the move higher rather than lower yields. This fits our narrative very well.

One sector worth highlighting is health care, performing very strong in the risk-on session yesterday. This is a bit odd in a historical context, but health care has been behaving like a cyclical sector in recent trading. This has certainly been a tremendous rally, but we take profits today and neutralize our health care sector call. Reason for this is that the positive health care call has been a valuation call, and this argument has rapidly changed. The relative discount has gone from 20% to 10% vs global markets the last three months, which we think is a fair discount at this part of the cycle. For instance, health care now trades close to the multiple of consumer staples, after a 20% discount at the bottom.

FI and FX: Yesterday's Fed rate cut was a rather balanced one, but given that markets expected a hawkish cut, market reactions were slightly to the soft side. Rates rallied somewhat and the USD weakened a tad with EUR/USD trading at 1.169. Only tiny and transitory, negative reactions in EUR/SEK and EUR/NOK following the FOMC decision. Ahead of the Fed rate decision European rates rose once again, resulting in the fifth consecutive day of higher rates. Potential rate cuts for the ECB have by now been eliminated for 2026. This morning, EUR/SEK is back at 10.84 and EUR/NOK trades at 11.83.

Australian Dollar weakened broadly after today’s significantly softer labor-market report, though it continues to show relative resilience against the U.S. Dollar and most majors—with the notable exception of Kiwi. The sharp downside surprise in employment has tilted sentiment in favor of further downside in AUD/NZD as markets reassess the likelihood of near-term RBA tightening.

Speculation of a 2026 RBA rate hike had intensified in recently, particularly after Governor Michele Bullock signaled that cuts were not on the horizon and that the Board had actively discussed scenarios in which rates might need to rise.

However, today’s -21.3k contraction in employment has sharply undercut that momentum. The data suggest that any discussion of a rate hike in the near term is premature. A long pause now appears the more plausible baseline—at least through Q1—while the RBA waits for a fuller run of data to determine whether underlying developments justify movement in either direction.

Technically, AUD/NZD is extending the corrective pattern from 1.1634. Today's dip suggests the recovery from, as the second leg of the correction form 1.1634, might have completed at 1.1514 already. Deeper fall would be seen to 1.1396 first.

Break there will extend the fall to 61.8% projection of 1.1634 to 1.1396 from 1.1514 at 1.1367, and possibly further to 100% projection at 1.1267. But even in this case, downside should be contained by 1.1275 cluster support, which is slightly below 38.2% retracement of 1.0649 to 1.1634 at 1.1258.

The up trend from 1.0649 is expected to resume through 1.1634 at a later stage. But that will require renewed conviction that the RBA is genuinely preparing for a rate hike in 2026.

Australia’s November labor data delivered a downside surprise, with employment falling by -21.3k against expectations for a 20k increase. The weakness was driven by a sharp -56.5k drop in full-time positions, partly offset by a 35.2k rise in part-time roles.

Despite the weaker headline, unemployment rate held at 4.3%, better than the expected uptick to 4.4%. The jobless rate has now been steady at 4.3% in five of the past six months, reflecting a labor market that is loosening but not deteriorating sharply. Participation rate dipped -0.2pts to 66.7%, suggesting some softening in labor-force engagement.

Monthly hours worked were unchanged on the month but still up 1.2% yoy, indicating modest resilience in total labor input despite weaker job creation.

Full Australia employment release here.

The Dollar Index (DXY) has broken decisively below the December 4 low at 98.76, establishing a clear bearish sequence from the November 21 peak. This structural decline favors continued downside momentum. The immediate target is the 100% Fibonacci extension measured from the November 21 peak, which projects toward 97.7. From that peak, wave ((i)) concluded at 99, followed by a corrective rally in wave ((ii)) that terminated at 99.56. The Index then extended lower in wave ((iii)) toward 98.82, while the subsequent rally in wave ((iv)) ended at 99.02. The final leg, wave ((v)), reached 98.76, thereby completing wave 1 of a higher degree cycle.

Following this initial decline, the Index staged a corrective advance in wave 2, unfolding as a double three Elliott Wave structure. From the termination of wave 1, wave ((w)) ended at 99.12, while the pullback in wave ((x)) concluded at 98.79. A final push higher in wave ((y)) reached 99.32, completing wave 2 in higher degree. With this correction finished, the Index has resumed its downward trajectory in wave 3. From the wave 2 high, wave ((i)) ended at 99.13, and the rally in wave ((ii)) terminated at 99.3. In the near term, as long as the pivot at 99.32 remains intact, rallies are expected to fail. The decline should continue to unfold in sequences of 3, 7, or 11 swings, reinforcing the bearish outlook and favoring further downside pressure toward the projected Fibonacci target.

Dollar Index (DXY) 60-Minute Elliott Wave Chart From 12.11.2025

DXY Elliott Wave Video:

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

Key Highlights

• GBP/USD gained pace for a move above the 1.3350 resistance.
• A key bullish trend line is forming with support at 1.3325 on the 4-hour chart.
• EUR/USD rallied above 1.1650 and 1.1680.
• USD/JPY saw a bearish reaction after the Fed rate cut of 0.25%.

GBP/USD Technical Analysis

The British Pound started a strong increase above 1.3320 against the US Dollar. GBP/USD even cleared the 1.3350 barrier to enter a positive zone.

Looking at the 4-hour chart, the pair settled above the 1.3350 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). A high was formed at 1.3392, and the pair is now consolidating gains.

There is also a key bullish trend line forming with support at 1.3325. Immediate resistance sits near 1.3390. The first key hurdle is seen near 1.3400.

A close above 1.3400 could open the doors for a move toward 1.3450. Any more gains could set the pace for a steady increase toward 1.3500. On the downside, there is key support at 1.3340 and the 50% Fib retracement level of the upward move from the 1.3287 swing low to the 1.3392 high.

The next support is 1.3325 and the trend line. A close below 1.3325 could open the doors for a test of 1.3280. The main support sits near the confluence zone at 1.3220, and the 100 simple moving average (red, 4-hour).

Looking at EUR/USD, the pair gained pace for a strong increase and was able to clear the 1.1680 resistance zone.

Upcoming Key Economic Events:

• US Initial Jobless Claims - Forecast 220K, versus 191K previous.

The FOMC is optimistic on growth and inflation. Westpac sees uncertainty on both fronts.

The FOMC cut the fed funds rate by 25bps to a midpoint of 3.625% at their December meeting as the market had hoped. However, the Committee held to September’s projection of just one more cut in 2026 and another in 2027 to a broadly neutral rate of 3.125% by end-2027 compared to the market’s expectation for a return to neutral policy by end-2026.

Warranting a slow normalisation of policy, the FOMC now expects above-trend growth in 2027 (2.3% from 1.8% in September) and 2028 (2.0% from 1.9%), arguably because of support for consumption from real income growth and as the AI-related infrastructure build out continues. In the press conference, Chair Powell also noted that 0.2ppts of growth had been transferred from 2025 to 2026 because of late-2025’s Government shutdown. The unemployment rate profile is little changed, expected to grind lower to the full employment level of 4.2% in 2028.

The Committee showed little concern over the inflation outlook, with a measured descent in annual core inflation forecast from 3.0% in 2025 to 2.5% in 2026, then 2.1% in 2027 and 2.0% in 2028. In effect, moderately restrictive policy is expected to prove successful over time, allowing the FOMC to meet both sides of its mandate.

Westpac believes the US faces material capacity constraints across power, logistics and other essential services owing to a lack of breadth in business investment and given migration reform. We expect this constraint to hold activity growth around trend, versus the FOMC’s more optimistic view, and to result in greater persistence in inflation and associated risks.

Our forward view for the fed funds rate is consistent with the FOMC’s for 2026, with the cut most likely to come in early-2026 before inflation’s persistence becomes a concern. But thereafter we expect the Committee to remain on hold at 3.375% and for inflation risks to bias up long-term yields, along with growing fiscal uncertainty.

EURCHF: ⬇️ Sell

• EURCHF reversed from resistance area
•  Likely to fall to support level 0.9300

EURCHF currency pair recently reversed up from the resistance area between the resistance level 0.9390 (former monthly high from September), upper daily Bollinger Band and the 50% Fibonacci correction of the downward impulse from April.

The downward reversal from this resistance zone stopped the previous minor ABC correction ii from November.

Given the overbought daily Stochastic and clear daily downtrend, EURCHF currency pair can be expected to fall to the next support level 0.9300.

CHFJPY: ⬆️ Buy

• CHFJPY reversed from pivotal support level 192.60
•  Likely to rise to resistance level 195.50

CHFJPY currency pair recently reversed up from the support zone between the pivotal support level 192.60 (former monthly high from October) and the support trendline of the daily up channel from October.

The upward reversal from this support zone started the active impulse wave 3 of the intermediate impulse wave (3) from the start of November.

Given the overriding uptrend on the daily charts, CHFJPY currency pair can be expected to rise to the next resistance level 195.50 (which stopped wave 1).

Summary

• As expected, the FOMC reduced the fed funds target range by 25 bps to 3.50%-3.75% and signaled that additional easing will face a higher bar at its next meeting on January 28.
• The post meeting statement signaled this higher bar to future cuts by noting it was now considering the "extent and timing" of additional adjustments. The suggestion that the FOMC would not be so ready to cut the policy rate again in the near term likely helped to limit the number of hawkish dissents to two (Presidents Goolsbee and Schmid). Governor Miran again dissented in favor of a 50 bps cut.
• Despite two hawkish dissents and the dot plot revealing four other regional bank presidents preferred to hold the policy rate steady today, the Committee maintains an easing bias. The updated Summary of Economic Projections showed the median estimate for the policy rate at the end of next year to be 3.375%, unchanged from September.
• The expectation among most members to ease next year reflects projections for the unemployment rate to be a touch above most participants' estimate for full employment next year, while inflation resumes its progress back toward—albeit not all the way to—the FOMC’s 2% target. The Q4-2026 median projection for the unemployment rate was unchanged at 4.4%, while the median estimate for headline and core PCE inflation ticked down to 2.4% and 2.5%, respectively. More noticeable was the median estimate for GDP growth next year rising half a percentage point to 2.3% on a Q4/Q4 basis, putting it closer to our above-consensus estimate of 2.5%.
• There is a slew of economic data between now and the next meeting on January 28, and we will be monitoring it closely and adjusting our forecast as conditions warrant. Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase. We continue to look for two more 25 bps cuts from the FOMC next year at the March and June meetings.
• The Federal Reserve also announced the beginning of reserve management purchases (RMPs) in an effort to maintain short-term interest rate control, keep bank reserves ample and ensure the smooth functioning of financial markets. Fed officials have been clear for months that this step in no way represents a change in the stance of monetary policy. We agree with this assessment, and the beginning of RMPs will have no bearing on our view of the stance of monetary policy.

A Cut to Close out the Year

As expected, the FOMC reduced the fed funds target range by 25 bps to 3.50%-3.75% at the conclusion of its December meeting. As was also anticipated, the decision was not unanimous. Three voting members did not support the policy decision, with dissents registered in both a more hawkish and dovish direction. Specifically, Governor Miran dissented in favor of a steeper, 50 bps cut, while Presidents Schmid (Kansas City) and Goolsbee (Chicago) dissented in favor in keeping the policy rate unchanged.

The dispersed views on the best course of action reflect the tricky environment the FOMC finds itself in. The FOMC did not have several key readings on the economy as originally scheduled due to the government shutdown (e.g., Q3 GDP, Oct. & Nov. Employment Situation and CPI, etc.). But, the latest data available continue to indicate some tension in the Committee’s employment and inflation mandates (Figures 1 & 2).

With 75 bps of cuts since September and policy not as clearly restrictive, the bar for additional easing has been raised. In the post meeting statement, the Committee gave itself more optionality around future cuts, saying that "In considering the extent and timing of additional adjustments to the target range...", with the emphasized text new to the statement. The suggestion that the FOMC will not be so ready to cut rates again in the near term likely helped to limit the number of hawkish dissents.

The Summary of Economic Projections did signal some broader unease among the Committee besides the two hawkish dissents. The dot plot revealed that six participants in total did not favor reducing the policy rate at today's meeting, implying four non-voting regional presidents also preferred to hold the policy rate steady. Nonetheless, a bias toward further easing persists among the Committee. The median dot for year-end 2026 and 2027 remained at 3.375% and 3.125%, respectively. The longer-run median was unchanged at 3.00%, with the dot plot illustrating that all but two participants see the current policy rate at least somewhat restrictive.

The biggest change to the SEP was a major upward revision to the 2026 growth outlook, with the median projection rising from 1.8% to 2.3%. Some of this change likely reflects the government shutdown, with Q4-2025 real GDP growth expected to see a material drag, setting the economy up for a bounce-back in Q4-2026. That said, this dynamic cannot fully explain the change, and it puts the median FOMC participant closer to our above-consensus forecast of 2.5% real GDP growth next year. Elsewhere, the changes generally were smaller, with some modest downward revisions to the inflation forecasts next year, and no change to the median longer run projections for the real GDP growth and the unemployment rate.

The Federal Reserve also announced that it will begin growing its balance sheet again in the coming days through the purchase of Treasury bills. As we have discussed previously, these purchases are meant to maintain short-term interest rate control, keep bank reserves ample and ensure the smooth functioning of financial markets. Fed officials have been clear for months that this step in no way represents a change in the stance of monetary policy. We agree with this assessment, and the beginning of reserve management purchases (RMPs) will have no bearing on our view of the stance of monetary policy.

Specifically, the central bank announced that RMPs will begin on December 12 with an initial pace of $40 billion for the month. The post-meeting guidance stated that "the pace of RMPs will remain elevated for a few months to offset expected large increases in non-reserve liabilities in April. After that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities." Our working assumption has been that the medium term, "equilibrium" pace of RMPs will be $25 billion per month to keep bank reserves ample. We read the above guidance as indicating that RMPs will downshift to roughly this pace starting in the spring. If realized, the Fed's balance sheet will grow by roughly $370 billion in 2026, and the reserve-to-GDP ratio will be 9.7% at the end of next year, comfortably above the lows in September 2019 when repo markets blew up (Figure 6).

Our base case remains that the current easing cycle is not over yet but rather that it is entering a slower phase. While the labor market is far from collapsing, the softening in conditions to the wrong side of "maximum employment" supports policy returning to a more neutral position. Directional progress on inflation next year should resume as the initial lift from tariffs fade, which would reduce the tension between the FOMC's employment and inflation mandate. We continue to look for two 25 bps rate cuts next year at the March and June meetings. Next week's economic data, specifically the "one and a half" employment report on Tuesday and the November CPI on Thursday, will be key to the outlook. We will have reports out previewing these data releases in the coming days.