Sometimes, the truth is hard to say—and even harder to hear. The Federal Reserve (Fed) announced another 25bp cut as widely expected and priced in, but hinted that there will be just about two rate cuts throughout next year. The GDP forecasts for this year and the next were revised higher, the unemployment rate lower, and more importantly, the inflation projections were sensibly higher compared to the September projections. The verdict was clear: the Fed must slow down. Powell said that they’re ‘at or near a point at which it will be appropriate to slow the pace of further adjustments’. Fun fact: they have started cutting rates just three months ago – with a jumbo cut. I think I’ve rarely seen a Fed team acting this erratic.

The market reaction was very aggressive, of course. The US 2-year yield spiked past the 4.35%, the 10-year spiked past 4.50%. The S&P500 dropped nearly 3%, Nasdaq 100’s more rate-sensitive, growth stocks tumbled 3.60% and the Dow Jones smashed more than 2.50%, and extended losses to more than 6% since the beginning of December for the 10th straight session – apparently its longest since 1974. Note that the Dow Jones has been diverging negatively from its tech-heavy peers since the beginning of the month – signalling a renewed concentration on tech stocks. But this time, even the rising stars of the tech couldn’t swim against the tide. Broadcom tumbled nearly 7% yesterday, while Nvidia lost 1.14%. Altogether, the Magnificent 7 stocks gave back a hefty 4.40% after the Fed announcement.

The Fed may have spoiled this year’s Santa rally, as its hawkish shift could trigger a deeper correction across US equity markets—which have enjoyed two stellar years largely thanks to Big Tech. Excluding these giants, the S&P 493 delivered solid, albeit far less impressive, performance. Non-tech sectors have been waiting for Fed rate cuts to claim their share of the pie. Unfortunately, the latest equity rally may fade before it extends to these overlooked corners of the market.

In FX and commodities, the US dollar rallied aggressively across the board, the dollar index jumped more than 1% and gold tipped a toe below the $2600 per ounce and below its 100-DMA. Higher US yields increase the opportunity cost of holding the non-interest bearing gold, yet an accelerated selloff and a prolonged weakness in equity markets could drive capital toward the safety of the yellow metal.

The EURUSD tumbled to 1.0344 on the back of a sharp hawkish shift from the Fed, and the bears are now eyeing the parity as their next big target. On the way, the 1.02 – 61.8% Fibonacci retracement on post-pandemic rebound – should provide the last major support to the EURUSD.

In Japan, the Bank of Japan (BoJ) maintained its policy rate unchanged. Only one out of 9 members voted to hike rates today. The others said they needed more time to assess the risks from Trump policies and the wage outlook. As such, the USDJPY rallied above the 155 level, and is supported by the combination of more hawkish Fed and less hawkish BoJ.

The Bank of England (BoE) is the next major central bank to announce its policy verdict later today. The British policymakers are expected maintain rates unchanged at today’s MPC meeting. The BoE had turned relatively bearish earlier this year, before the Autumn Budget announcement. But the higher government spending plans gave cold feet to Mr Bailey, who immediately stepped back from his ‘more aggressive rate cut’ plans. The problem is, the benefits of higher government spending will probably kick in after the pain of higher taxes to finance it.

And the BoE may have to give its support during this period without fuelling inflation – that’s started giving signs of heating up over the past two months. It’s complicated. As per sterling, Cable was hit by a broadly stronger US dollar yesterday. A cautious stance from the BoE may slow down but not reverse the negative trend provided that the UK’s economy – which performed surprisingly well this year – could feel the pinch of higher taxes before it enjoys the benefits of improved growth. The ‘pain before gain’ scenario could keep the sterling bulls on the sidelines.

In energy, the Fed’s hawkish shift dampened an early rebound in oil prices yesterday. The rebound had been supported by lower-than-expected US oil inventories last week, but the barrel of US crude slipped back to $70 per barrel. The Fed’s cautious stance, coupled with a weak demand outlook and ample supply, lent further strength to the bears. We anticipate rangebound trading within the $67–$70 per barrel range.

Hawkish Outcome: Fresh Highs for GBP/EUR

Above: GBP/EUR at daily intervals.

Dovish Outcome: A Fall Back to 1.20

Source: Poundsterlinglive

GBP/JPY has halted its two-day losing streak, trading around 195.50 during the Asian session on Thursday. The GBP/JPY cross is appreciating as the Japanese Yen (JPY) struggles after the release of the Bank of Japan's (BoJ) decision to keep interest rates unchanged.

The Bank of Japan maintained its policy rate for the third consecutive meeting, keeping the short-term rate target within the range of 0.15%-0.25% after its two-day monetary policy review, in line with market expectations.

The Summary of the BoJ Policy Statement stated that Inflation is expected to reach a level broadly consistent with the BoJ's price target in the latter half of its three-year projection period, extending through fiscal 2026. However, uncertainty surrounding Japan's economic and price outlook remains significant. The impact of foreign exchange (FX) volatility on inflation could be more pronounced than in the past, owing to changes in corporate wage and price-setting behaviors.

The upside of the GBP/JPY cross is bolstered by the improved Pound Sterling (GBP), which could be attributed to the increased likelihood of the Bank of England (BoE) keeping interest rates unchanged later in the day while remaining focused on addressing elevated domestic inflation.

Data showed on Wednesday that the UK Consumer Price Index (CPI) rose by 2.6% year-over-year in November following 2.3% growth in October. Core CPI, excluding volatile food and energy items, increased 3.5% YoY in November, compared to a previous rise of 3.3%. Meanwhile, the annual services inflation steadied at 5%, below forecasts of 5.1% but above the BoE's estimate of 4.9%.

Source: FXSTREET

In focus today

A packed European central bank day kicks off with the Riksbank decision at 9:30 CET. We expect a 25bp cut to 2.50% and that the central bank will maintain a message of more cuts at the beginning of 2025. Following the November decision to cut by 50bp to 2.75%, the communication has been that the September rate path largely holds. We expect the new rate path to signal an endpoint of around 2.10%. 

We expect Norges Bank to keep the policy rate unchanged at 4.5% and to signal that the first cut is most likely to be delivered in March. The decision will be published at 10:00 CET. We expect that the rate path will be marginally adjusted upwards and indicate between three and four rate cuts next year and a policy rate of just over 2.5% towards the end of the forecast period. This is well in line with the current market pricing for next year, but significantly lower for 2026-27. 

For the Bank of England (BoE) decision at 13:00 CET, we expect the Bank Rate to be kept unchanged at 4.75% in line with consensus and market pricing. We pencil in a vote split of 8-1. Note, this meeting will not include updated projections nor a press conference. In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we pencil in a slowdown to only quarterly cuts. This leaves the Bank Rate at 3.25% by end-2025. 

Today’s data calendar is light with the US Philly-Fed business sentiment indicator for December being one of few highlights. In Sweden, the social partners within the industry exchange demands for the 2025 wage negotiation this morning.

Economic and market news

What happened overnight

Bank of Japan (BoJ) chose to keep rates unchanged, which was in line with market pricing and our call. The vote split was 8-1. The economic recovery in Japan looks on track, real wages have at least stopped falling and inflation is close to target. Thus, there is a sound case for hiking rates. The need for yen-support however seemed a bit less acute and the cost of postponing to January had come down. At least that was the case before the hawkish Fed turn yesterday. The yen has had some rough hours, sliding another 1% vs. the USD, first on the FOMC meeting and then the BoJ announcement. If anything, Governor Ueda will probably take a hawkish tone on the press conference to avoid adding further to the yen slide. We expect the BoJ will hike by 25bp in January.

What happened yesterday

The Federal Reserve cut the policy rate target by 25bp to 4.25-4.50% at last night’s meeting, yet Chair Powell struck a very hawkish tone on the outlook. Policy has entered ‘a new phase’, and barring major downside data surprises, the Fed expects a slower pace of rate cuts starting from January. The updated median dots now project only a single 25bp cut every six months for the next 2.5 years, while the longer-term dot was raised by 0.1pp to 3.0%. We have revised up our forecast for the Fed funds rate, and now expect only quarterly 25bp cuts from Mar/25 onwards. We maintain our terminal rate forecast at 3.00-3.25% (reached in Mar/26, prev. Sep/25). See Fed review: In a new phase, 18 December.

In the UK, inflation surprised slightly to the downside in November but overshot the BoE’s forecast. Headline came in at 2.6% y/y (consensus: 2.6%, prior: 2.3%, BoE: 2.4%), core at 3.5% y/y (consensus: 3.6%, prior: 3.3%) and services at 5.0% y/y (consensus: 5.1%, prior: 5.0%, BoE. 4.9%). While service inflation momentum slowed, our own measure of core services, which excludes volatile components, increased slightly after edging lower the past many months. Service inflation is likely to stay around 5% for the next couple of months, arguing for a more gradual approach from the BoE.

In US politics, incoming President Trump warned fellow Republicans of potential ousting if they chose to support House Speaker Johnson’s bipartisan funding bill, which would extend the current funding debate until mid-March. Trump insists that the bill should include an increase in the debt ceiling. If new funding is not agreed upon by Saturday, a partial shutdown of the US government could be the consequence.

Equities: Global equities declined sharply yesterday, driven by the US and the hawkish cut from the Federal Reserve, combined with a notable increase in inflation expectations in the Summary of Economic Projections (SEP). US equity markets got all the attention yesterday, as most indices experienced their worst session since the early August turmoil and ended close to the day’s low following the Fed meeting. With the significant turnaround, some of the past winners were sold off the most, particularly in consumer discretionary and auto & components sectors, with Tesla leading the decline, down 8%. Additionally, inflation fears resurfaced, impacting growth stocks and especially small caps, with the Russell 2000 losing 4.4% yesterday. The VIX increased from 16 to 28, which speaks more about investors’ positioning leading into this rather than the Fed change yesterday. As we approach Christmas, this situation becomes more delicate, as many investors likely remember 2018, when equities plummeted in December, accelerating towards Christmas Eve, only to recover the losses in the following three months. While we are in a different macroeconomic and monetary environment this time, we perceive risks for the markets, as investors are heavily loaded on risk and might be tempted to de-risk ahead of the holiday season. In the US yesterday, Dow -2.6%, S&P 500 -3.0%, Nasdaq -3.6%, and Russell 2000 -4.4%. Asian markets are lower this morning, but the movements are rather limited compared to what happened on Wall Street yesterday. US futures are mixed while European fugures are down by 1-1.5%.

FI: US rates rose significantly following yesterday’s hawkish signals from Powell. The UST curve trades about 13-15bp higher this morning, which will of course have implications for the EUR rates markets today. As market-based inflation expectation measures are (roughly unchanged), yesterday’s strong increase in yields and deep drop in equities has left US financial conditions significantly tighter. If this spills over to the EUR market, it could warrant a softer tone from the ECB at the coming period. The pricing of Fed cuts next year is about 20bp lower with only 35bp priced until end-2025. The EUR curve was roughly unchanged with the action happening after the close.

FX: FOMC decided to cut the Fed funds target range by 25bp to 4.25-4.50%, as expected. It was a hawkish cut as the rate path was lifted by half a percentage point for both 2025 and 2026, thus signalling a slower easing pace from here. The USD took a leap higher as did US yields. EUR/USD dropped well below 1.04 and USD/JPY toward 154.50, where the latter rose another figure to around 155.50 after the Bank of Japan left rates unchanged this morning. The overall reaction in EUR/Scandies was muted, though with a slight move higher. In relation to the Riksbank’s rate decision today, market-moving surprises, if any, could come with guidance including the rate path. We expect unchanged rates from both the Bank of England and Norges Bank, in line with market pricing, and hence we expect the FX response will be muted.

Source: ACTIONFOREX