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.

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

Source: ACTIONFOREX

The year 2024 has been a transformative period in the global financial markets, characterised by a mix of challenges and opportunities. Inflation battles, monetary policy shifts, economic uncertainties, and surprising bouts of optimism dominated the landscape. These forces created a volatile yet dynamic environment where some markets flourished while others struggled under significant pressure.

From central bank interventions to geopolitical developments and technological advancements, every corner of the financial world experienced notable activity. 

Inflation and Interest Rates: A Balancing Act

In 2024, inflation showed signs of moderation globally. In the United States, it stabilised around 2.7%, marking a notable shift that bolstered market confidence and set a cautiously optimistic tone for the broader economy.

Throughout the year, rate cuts dominated monetary policy discussions. Following the unprecedented rate hikes implemented in response to the COVID-19 pandemic, major central banks began scaling back rates. However, they had to walk a tightrope between a complex landscape of lower but still stubborn inflation and resilient labour markets and the necessity for monetary easing. The magnitude and pace of these cuts varied significantly, reflecting differences in economic conditions across regions and creating complex relationships in the forex market.

Analysts widely anticipate that policymakers will adopt a more measured approach to easing monetary policy as 2025 unfolds. Most developed market central banks, excluding Japan, are expected to reduce interest rates to neutral levels by the year’s end. However, if economic conditions deteriorate more than anticipated, there is potential for central banks to push rates below neutral to support growth.

The Fed, in particular, faces a delicate balancing act, as it must carefully navigate potential policy developments—such as trade tariffs—that may not ultimately materialise. At the same time, any resurgence in inflationary pressures could prompt a shift toward a more restrictive rate trajectory in 2025 and beyond, further complicating the policy landscape.

Forex Market: A Year of Divergence

Currency markets in 2024 were shaped by a combination of monetary policy shifts, economic recovery efforts, and political developments. The US dollar experienced a rollercoaster year, initially depreciating against major currencies as markets anticipated the Federal Reserve’s first rate cut since the COVID-19 pandemic. However, it rebounded toward the end of the year, influenced by post-election optimism and expectations of protectionist trade policies under the Trump administration.

The British pound demonstrated resilience throughout 2024, supported by the Bank of England’s patient and measured approach to monetary policy. Despite potential rate cuts, the pound maintained its strength, reflecting confidence in the UK’s economic fundamentals. In contrast, the euro faced significant headwinds. The ECB’s aggressive easing measures widened interest rate differentials with the pound and the dollar, weakening the euro. By the end of the year, trade uncertainty stemming from potential US tariffs weighed heavily on the euro, given the Eurozone’s dependence on global trade.

The Japanese yen experienced mixed fortunes, bolstered by the Bank of Japan’s decision to raise its benchmark interest rate to 0.25%, the highest level since 2008. This move provided much-needed support for the yen, although concerns about potential US trade policies created downside risks. Meanwhile, commodity-linked currencies such as the Australian and Canadian dollars saw fluctuations driven by interest rate differentials, global trade dynamics and their respective economies’ ties to the United States and China.

Analysts caution that President Trump’s tariff policies could intensify the overvaluation of the US dollar in 2025, potentially heightening the risk of global financial instability. The prospect of trade restrictions may add complexity to an already volatile economic landscape.

Commodity Markets: Precious Metals Shine, Oil Struggles

Commodity markets have seen a resurgence in investor interest. According to data from WisdomTree and Bloomberg, the proportion of investors allocating resources to commodities rose to 79% in 2024, compared to 71% in 2023—an expected rebound after a challenging year for commodities in 2023.

Precious metals, particularly gold and silver, emerged as top performers. As of time of the writing on 11th December, gold prices surged by over 30%, while silver outpaced gold with a 35% gain. Several factors drove these impressive performances, including geopolitical tensions, economic uncertainties surrounding the US presidential election, and strong demand from emerging market central banks. According to analysts, these factors should continue supporting precious metals in 2025.

Natural gas prices also experienced significant growth, rising 30% to 50% across major markets in Asia, Europe, and North America. Colder weather forecasts have fueled demand, particularly in Europe and Asia. Analysts suggest that this bullish sentiment in gas markets is likely to persist through the winter, with prices unlikely to see significant declines until well into 2025. However, high gas prices are expected to increase power costs globally, straining fragile economic growth in key regions such as China and Europe while rekindling inflationary concerns.

Oil, however, faced a challenging year despite geopolitical crises and production cuts. One of the reasons is a weak demand, particularly from China. In the United States, gasoline inventories exceeded long-term seasonal levels. According to analysts, the growing transition to electric vehicles in developed markets represents a long-term challenge for oil demand. Although some analysts anticipate a recovery in 2025 as OPEC+ production cuts take effect and geopolitical risks persist.

Stock Markets: Tech Leads the Charge

The US stock market delivered robust performances in 2024, reaching new record highs, with the technology sector at the forefront. Innovations in artificial intelligence (AI) played a pivotal role in driving growth, with major companies such as Microsoft, Nvidia, and Amazon reporting strong earnings. This momentum boosted broader indices, with the S&P 500 and Nasdaq 100 recording gains of 28.57% and 27.4%, respectively, as of 10th December.

The broader market also benefited from declining inflation, interest rate cuts, and better-than-expected corporate earnings. These factors may contribute to the stock market growth in 2025. However, stretched valuations temper some of the optimism, and concerns about potential trade tariffs add a layer of uncertainty.

Looking Ahead to 2025: Key Market Drivers

As we look ahead to 2025, several critical factors are poised to influence the direction of financial markets.

Central Bank Policies

Central banks will remain pivotal in shaping financial markets in 2025. The balance between maintaining growth and addressing inflationary pressures will be a key theme for central banks throughout the year, influencing the strength of equity markets. Interest rate differentials will play a significant role in determining currency movements.

Global Economic Recovery

The global economy is expected to continue rebounding from pandemic effects. GDP growth, employment trends, and trade balances will be key factors influencing financial markets.

Trade War Uncertainty

Potential trade tariffs pose a significant risk. The scope, products, and geographies targeted will determine the impact on global GDP, inflation, and interest rates. Any escalation in trade tensions could disrupt markets and strain economic recovery.

Artificial Intelligence and Innovation

AI and emerging technologies may drive productivity gains, offering an upside to global growth. By boosting efficiency and reducing costs, AI could also exert disinflationary pressure, influencing economic dynamics in the long term.

Geopolitical Tensions

Geopolitical risks, including trade disputes and political conflicts, remain unpredictable but could disrupt markets.

Final Thoughts: Embracing Opportunities Amid Volatility

The year 2024 brought its share of challenges and opportunities, showcasing the resilience and adaptability of global markets. From navigating geopolitical uncertainties and evolving monetary policies to embracing the transformative potential of technologies like artificial intelligence, market participants faced a dynamic landscape.

Looking ahead to 2025, the horizon offers new opportunities. Continued advancements in innovation, shifts in economic policies, and the resolution of key global tensions could set the stage for exciting market fluctuations. Use the new year to test your skills and look for new opportunities!

AUDUSD: Bearish sentiment starts in 2024

Australia’s economy demonstrated a mixed performance this year. The RBA maintained the cash rate at 4.35% to combat persistent underlying inflation, which remained around 3.5%. Economic growth was sluggish, with GDP increasing by only 0.8% over the year. The labor market showed resilience, with the unemployment rate at 4.1% in October. The Australian dollar fluctuated due to global economic uncertainties and domestic policy decisions. In 2025, the economic outlook is cautiously optimistic. The RBA is expected to gradually reduce the cash rate as inflationary pressures ease, aiming for the 2-3% target range by mid-to-late 2025. GDP growth is projected to improve but remain below trend, supported by government spending and a recovery in household consumption. The labor market is anticipated to stabilize, with unemployment rates potentially rising slightly as demand and supply balance out.

AUDUSD has lost around 5% during 2024, but from a technical standpoint, the pair is down more than 8% following the significant pullback from the 20-month high of 0.6940. The commodity currency dived toward a fresh 13-month low at 0.6340, holding beneath the long-term ascending trend line. In 2025, the price might see further descending movements with immediate support levels coming from 0.6270 and 0.6170. However, a potential upside retracement may send traders to the 0.6440 barrier, which holds above the uptrend line ahead of the 50- and 100-week SMAs around 0.6600. Technical oscillators are endorsing the negative scenario.

NZDUSD: Is it time to exit from the trading range?

In 2024, New Zealand’s economy faced significant challenges. The RBNZ reduced the official cash rate to 4.25% to stimulate economic activity amid weak performance and rising unemployment. Inflation fell to 2.2%, within the RBNZ’s target range, but domestic prices, especially for services, remained high. Despite signs of recovery, the outlook remained cautious with expectations of further interest rate cuts. Looking ahead to 2025, the RBNZ aims to keep inflation within the 1-3% range, with the OCR potentially dropping to 3.3%. GDP growth is forecasted at 2.1%, with unemployment around 5.2%. Wage growth is expected to be moderate at 2.8%.

NZDUSD has been in a consolidation area since January 2023 with the upper boundary at the 0.6380 resistance level and the lower boundary at the 0.5770 support. Currently, the market is facing a real struggle near the aforementioned support, recording a new 26-month low of 0.5752. More steeper decreases could open the way for the next round numbers, such as 0.5700 and 0.5600, before meeting the bottom from October 2022 at 0.5510. Alternatively, a higher move could support the trading range once more, with the resistance line located within the 0.6040-0.6100 area, which encompasses the 50- and 100-day simple moving averages (SMAs). Momentum oscillators are mirroring the descending movement.

USDCAD: In new highs before 2025

Canada’s economy faced several challenges during the year. The BoC reduced the policy rate to 3.75% by October to counteract weak economic growth and rising unemployment. Inflation fell to around 2%, aligning with the BoC’s target range, but the distribution of inflation rates across different components remained uneven. The Canadian dollar experienced volatility, influenced by global economic conditions and domestic policy decisions. Despite these efforts, economic growth was sluggish, with GDP growth remaining modest. 2025’s economic outlook is cautiously optimistic.  The BoC is expected to continue reducing interest rates as inflationary pressures ease, aiming to support economic activity. GDP growth is projected to improve gradually, supported by stronger consumer spending and business investment. The labor market is anticipated to stabilize, although unemployment may remain slightly elevated.

USDCAD has been creating an intriguing bullish rally lately, sending the market to a fresh four-and-a-half-year high of 1.4244, following the strong bounce off 1.3420. The next resistance line traders should keep in mind is the April 2020 peak at 1.4265.  Even higher, the March 2020 peak at 1.4680 looks to be a critical level, but first the bulls need to overcome the psychological marks of 1.4300, 1.4400, and 1.4500. On the downside, immediate support could come from 1.3945, ahead of the 50-day SMA at 1.3675 and the 1.3640 barricade.  The technical oscillators are showing some mixed signals, with the RSI indicating an overstretched market and the MACD still extending its bullish momentum.

(Dec 17): Chinese leaders agreed last week to raise the budget deficit to 4% of gross domestic product (GDP) next year, its highest on record, while maintaining an economic growth target of around 5%, two sources with knowledge of the matter said.

The new deficit plan compares with an initial target of 3% of GDP for 2024, and is in line with a "more proactive" fiscal policy outlined by leading officials after December's Politburo meeting and last week's Central Economic Work Conference (CEWC), where the targets were agreed but not officially announced.

The additional one percentage point of GDP in spending amounts to about 1.3 trillion yuan (US$179.4 billion or RM793.58 billion). More stimulus will be funded through issuing off-budget special bonds, said the two sources, who requested anonymity as they were not authorised to speak to the media.

These targets are usually not announced officially until an annual parliament meeting in March. They could still change before the legislative session.

The State Council Information Office, which handles media queries on behalf of the government, and the finance ministry did not immediately respond to a Reuters request for comment.

The stronger fiscal impulse planned for next year forms part of China's preparations to counter the impact of an expected increase in US tariffs on Chinese imports as Donald Trump returns to the White House in January.

The two sources said China will maintain an unchanged GDP growth target of around 5% in 2025.

A state media summary of the closed-door CEWC said it was "necessary to maintain steady economic growth", raise the fiscal deficit ratio and issue more government debt next year, but did not mention specific numbers.

Reuters reported last month that government advisers had recommended Beijing not to lower its growth target.

The world's second-largest economy has stuttered this year due to a severe property crisis, high local government debt and weak consumer demand. Exports, one of the few bright spots, could soon face US tariffs in excess of 60% if Trump delivers on his campaign pledges.

The US President-elect's threats have rattled China's industrial complex, which sells goods worth more than US$400 billion annually to the US. Many manufacturers have been shifting production abroad to escape tariffs.

Exporters say the levies will further shrink profits, hurting jobs, investment and economic growth in the process. They would also exacerbate China's industrial overcapacity and deflationary pressures, analysts said.

The summaries of the CEWC and the Politburo meetings also flagged that China's central bank would switch to an "appropriately loose" monetary policy stance, raising expectations of more interest rate cuts and liquidity injections.

The previous "prudent" stance that the central bank had held for the past 14 years coincided with overall debt — including that of the government, households and companies — jumping more than five times. The economy expanded roughly three times over the same period.

China is likely to rely heavily on fiscal stimulus next year, analysts say, but could also use other tools to cushion the impact of tariffs.

Reuters reported last week, citing sources, that China's top leaders and policymakers are considering allowing the yuan to weaken next year to mitigate the impact of punitive trade measures.

The CEWC summary kept a pledge to "maintain the basic stability of the exchange rate at a reasonable and balanced level". Readouts from 2022 and 2023 also included this line.

Source: Theedgemarkets

(Dec 17): Japan’s government plans to decisively back the expansion of nuclear power, dropping a decade-long policy of reducing dependence on the energy source and reversing curbs initiated following the 2011 Fukushima meltdown.

The nation, which relied on coal and natural gas for more than 60% of electricity generation last year, set out a proposed new energy strategy on Tuesday, which urges both nuclear and renewables to be utilised “to the fullest extent” to maintain growth and help curb emissions. The draft policy, which is expected to be adopted, also recommends the construction of entirely new reactors.

Nuclear should account for around 20% of the nation’s energy mix by fiscal 2040 and renewables for around 40% to 50%, according to the strategy, drafted by the trade ministry and advised by a 16-person panel of experts. Renewables accounted for about 23% of the power mix in fiscal 2023 and nuclear made up roughly 8.5%, according to the latest trade ministry data.

Nations globally are driving a nuclear power renaissance as governments and power-hungry industries seek to bolster energy security by limiting dependence on fuel imports and securing a reliable supply of emissions-free power.

Adding more emissions-free power is seen as crucial to allow Japan to attract more data centre operators and advanced manufacturing like semiconductor factories. Alphabet Inc’s Google and Nvidia Corp-backed cloud services firm Ubitus K K have both flagged an interest in using nuclear power in the nation, while companies including Microsoft Corp have invested in building local solar plants.

The revised energy strategy should also enable Japan, the fifth-largest carbon dioxide polluter, to boost decarbonisation efforts that have been criticised by scientists and climate groups as insufficient. Japan is currently considering a new target to cut emissions by 60% by 2035 from 2013 levels, though that remains less ambitious than countries like the UK.

Nuclear previously accounted for roughly a third of Japan’s power mix, and all 54 of the nation’s reactors were taken offline following the 2011 disaster at the Fukushima Dai-ichi power plant. Of 33 still operable reactors, only 14 are so far back online. A policy first introduced in 2014 had called on the nation to reduce its dependence on nuclear power.

Japan should consider replacing decommissioned plants with new, advanced reactors, the advisory panel recommended. Still, boosting nuclear output is likely to be challenging, as stringent regulations remain in place following the Fukushima disaster. Utilities must also go through a lengthy process to win public consent and other approvals.

Fossil fuels are seen accounting for 30% to 40% of Japan’s power mix by 2040, according to the panel, compared to 69% in fiscal 2023. The strategy highlighted a continued importance of coal and liquefied natural gas and called for the government to continue to develop resources at home and overseas.

Overall, Japan’s annual power demand is also expected to reverse recent declines, driven by rising electrification and demands from AI. Total power generation is seen rising to as much as 1,200 terawatt hours a year in 2040, up 20% from 2023.

Source: Theedgemarkets