Source: Euronews

Political uncertainties that had plagued Korea have eased somewhat following the passage of an impeachment motion against President Yoon Suk Yeol at the National Assembly over his failed imposition of martial law. However, concerns about economic volatility remain.

There is a growing consensus that the country's growth forecast for next year, already downgraded due to uncertainties surrounding the influence of former U.S. President Donald Trump’s policies following his return to the White House, could decline further to the 1 percent range due to the impact of the impeachment crisis.

The government pledged stable state management after the impeachment motion against Yoon was passed on Saturday, emphasizing that the economic impact during previous impeachment crises — when the Assembly passed motions against former presidents Roh Moo-hyun in 2004 and Park Geun-hye in 2016 — was limited.

However, in the two previous impeachment crises, the negative impact of political turmoil on the economy was largely mitigated because economic policies continued to be pursued independently. Moreover, external factors played a significant role in supporting economic growth — China’s rapid expansion in 2004 and a thriving global semiconductor market in 2016 both provided strong tailwinds that helped drive exports and sustain Korea's economic growth momentum.

This time, however, the situation is different.

Current cabinet members, including Prime Minister Han Duck-soo and Finance Minister Choi Sang-mok, are facing criticism for failing to prevent the president’s martial law plan despite having prior knowledge of it. This has tarnished their leadership and weakened the momentum for advancing crucial economic policies.

Adding to the challenges are deteriorating trade conditions, such as the anticipated high-tariff policies under the incoming Donald Trump administration and China’s slowing growth.

This is leading to predictions that shockwaves from Yoon’s impeachment, combined with the prolonged slump in domestic demand and other internal and external factors, could be greater than expected.

U.S. President-elect Donald Trump gestures to attendees at the Army-Navy football game in Maryland, Saturday. Reuters-Yonhap

The primary obstacle currently facing Korea’s financial and foreign exchange markets is the weak value of the won against the U.S. dollar, which stands in the 1,400 range against the greenback. Following Trump’s election victory, the strong dollar trend is expected to continue, with most forecasts predicting that the exchange rate will remain within this range through the first half of next year.

A depreciation of the won drives up import prices, potentially triggering a vicious cycle of high inflation and elevated interest rates.

Given Korea’s low food self-sufficiency rate and reliance on imported raw materials like flour and cheese, rising prices of these goods could place additional strain on household expenses.

This makes it increasingly difficult for the Bank of Korea (BOK), which prioritizes price stability, to implement a further rate cut to stimulate the economy.

The ongoing situation increases the likelihood that the country’s already downgraded growth forecast, impacted by Trump’s return to power, could decline further.

Even before the martial law fiasco, Korea’s growth forecasts by major research institutions had already been revised down to around 2 percent, signaling an increasing likelihood of low growth in the 1 percent range next year.

The figures, announced between the U.S. presidential election on Nov. 5 and Yoon’s martial law announcement on Dec. 3, include 2 percent from the Korea Development Institute, 2 percent from the Asian Development Bank, and 1.9 percent from the BOK.

“Given the current situation, next year’s growth rate is expected to be further downgraded by at least 0.1 to 0.2 percentage point,” Kim Gwang-suk, a senior researcher at the Institute for Korean Economy and Industry, said.

Global investment banks are also perceiving the domestic political situation as a negative factor that could constrain next year’s growth rate.

“We maintain our below-consensus growth forecast of 1.8 percent for 2025, yet with risks increasingly skewed to the downside,” Goldman Sachs said in a report issued on Dec. 9 and authored by Kwon Goo-hoon, senior Asia economist and managing director.

Against this backdrop, the BOK stressed the need for more proactive measures in response to the economic situation.

“If key financial and economic policies, including supplementary budgets, are smoothly carried out through cooperation between the ruling and opposition parties as well as the government, and if trust is built in the economic system’s ability to operate independently and normally, the impact on the economy will likely be limited,” the central bank said in a report on Sunday.

Source: Koreatimes

In focus today

Today all eyes are on the euro area December flash PMIs as the very large decline in November caused significant market moves. There was nothing positive in the November report where the services PMI fell below 50 to 49.5 for the first time since January, and the manufacturing PMI remained stuck at 45.2. We expect the economic situation to be little changed since November and forecast negative quarterly GDP growth in Q4. We thus expect the PMIs to decline slightly in December to 44.9 in the manufacturing sector and remain at 49.5 in the service sector.

We also receive the flash PMIs for November from the US and UK later in the day.

In France, the National Assembly will debate a “special law”, which will allow the 2024 budget to be rolled over to 2025 to avoid a government shutdown. The National Rally has said that it will support the law, thereby allowing the current caretaker government to manage minimal state expenditures until a new government is formed. While it is our base case that the law will pass there is a risk that it is not passed, which will increase uncertainty in French politics. In this case, President Macron will need to use an unprecedented law by the constitution to pass budgetary measures without going through Parliament.

Economic and market news

What happened overnight

In China, activity remains weak as retail sales for November came in weaker than expected at 3.0% y/y (consensus: 5.0%, prior: 4.8%). Coupled with Chinese credit growth slowing and money supply growth posing a drag with M1 at -3.7% y/y, albeit up from -6.1% y/y in October, the data highlights the need for more stimulus from Chinese authorities. Chinese equities edged lower on the data releases out overnight.

What happened since Friday

In France, the veteran centrist politician Francois Bayrou was appointed the role as prime minister on Friday. Barou is a long-term ally of president Macron as head of the centrist Democratic Movement (MoDem). Barou has the tacit support from the far-right national rally who said they will not back a no-confidence vote against him by default. However, while the prime minister is new, he will face the same old hurdles as Barnier given the highly divided National Assembly. Because of this, markets did not react to the announcement on Friday. Additionally, Moody’s downgraded France to Aa3 from Aa2 over the weekend since the outlook of the country’s public finances will be substantially weakened over the coming years.

In the UK, monthly GDP for October surprised to the downside at -0.1% m/m (cons: 0.1%, prior: -0.1%). There is likely some negative sentiment effects from the Autumn statement as flagged by the past PMI reports. The downside surprise is broad-based but in particular driven by industrial and manufacturing production affected by weather disruptions.

Equities: Global equities were lower on Friday and throughout last week, though we are talking about smaller movements alongside some indications of Christmas trading commencing, despite being in a busy period for central banks. The most interesting aspect last week was the bond market, with yields rising across all five days. Nevertheless, equities reacted only marginally to the movement in bonds. Growth and technology sectors performed well, despite the increase in yields, while small-cap stocks lost almost 1% relative to large-cap stocks last week. In the US on Friday, the Dow fell by 0.20%, the S&P 500 remained unchanged, the Nasdaq rose by 0.1%, and the Russell 2000 declined by 0.6%. Most Asian markets are in the red this morning. European futures are also lower, while US futures are slightly positive.

FI: It was another eventful week in the European fixed income market given the bearish reaction to the ECB meeting last week and the unexpected downgrade of France from Moody’s from Aa2 to Aa3. The 2Y and 10Y EUR swap rates rose some 10bp after the ECB meeting despite the dovish tone from Lagarde.

FX: Last week saw a generally stronger USD, only NOK outperformed, while we found JPY and CHF at the bottom. USD/JPY was rejected at 150 and instead closed the week 2.5% higher at above 153.50 as US yields soared. Meanwhile, EUR/USD gyrated between gyrated between 1.0450 and 1.0600, just to close the week around 1.0500. The CHF weakened after the surprise 50bp rate cut. EUR/CHF soared to a 1M high. EUR/SEK remained within a tight range just above 11.50. EUR/NOK dropped from 11.80 to around 11.70. This week, the central bank takes centre stage with five rates decisions within 17 hours on Wednesday and Thursday.

This would mechanically weigh on Sterling.

We have seen the Pound react notably to retail figures in 2024, ensuring the Pound will be kept on its toes right into the weekend.

Source:  Poundsterlinglive

Market participants gear up for a critical week that will feature several major central banks' last policy meeting of the year. Ahead of these key events, flash Manufacturing and Services Purchasing Managers Index (PMI) data for December from Germany, the Eurozone, the UK and the US will be watched closely by investors on Monday.

The US Dollar (USD) Index benefited from rising Treasury bond yields and the cautious market mood, gaining nearly 1% in the previous week. Early Monday, the USD Index fluctuates in a tight range below 107.00. The US economic calendar will also offer NY Empire State Manufacturing Index data for December. On Wednesday, the Federal Reserve (Fed) will announce monetary policy decisions and publish the revised Summary of Economic Projections (SEP) following its two-day meeting.

US Dollar PRICE Last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Japanese Yen.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

During the Asian trading hours, the data from Australia showed that the Judo Bank Composite PMI edged lower to 49.9 in December from 50.2 in November. Meanwhile, Retail Sales in China increased by 3% on a yearly basis in November, falling short of the market expectation for a 4.6% growth. After posting small weekly losses last week, AUD/USD holds steady above 0.6350 to begin the week.

EUR/USD gained traction on Friday and snapped a five-day losing streak. In the European morning on Monday, the pair clings to small daily gains above 1.0500. European Central Bank (ECB) President Christine Lagarde will be delivering a speech during the European trading hours.

After posting large losses on Thursday, GBP/USD continued to push lower and touched its weakest level since late November near 1.2600 on Friday. The pair stages a technical correction toward 1.2650 on Monday.

USD/JPY preserved its bullish momentum and rose more than 2% in the previous week. The pair stays in a consolidation phase at around 153.50 in the early European session. Jibun Bank Manufacturing PMI rose to 49.5 from 49 in November and Services PMI improved to 51.4 from 50.5.

Gold turned south in the second half of the previous week and registered large losses on Thursday and Friday. XAU/USD holds its ground on Monday and trades slightly above $2,650.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Source: FXSTREET