In focus today

Focus today will be on tonight’s FOMC meeting. We expect a 25bp cut, which is also fully discounted by markets. Apart from the rate decision, market attention will be on the updated rate projections, and especially on the FOMC’s latest view on the terminal rate level. We think Chair Powell will aim for a neutral tone in his remarks, but he is still likely to verbally open the door for slowing the pace of cuts. 

The UK November inflation out at 8:00 CET will be the data release to watch. Focus is on service inflation, which is expected to continue to show signs of stickiness around the 5% mark. Combined with the hawkish data surprises this week, this will support our call for a BoE pause tomorrow.

Today’s calendar also features the final euro area inflation figures for November, which will provide details on the drivers behind the drop in the services component. Additionally, ECB’s Lane and Muller are on the wire before noon.

Economic and market news

In the US, retail sales figures landed close to expectations at 0.4% y/y in November when measured by the control group (which strips out the most volatile components). Car sales and online sales contributed positively, while other more discretionary categories (furniture, electronics, restaurants) saw weaker or negative sales growth. This could be a signal of a tad more cautious consumer, but of course the monthly data is volatile as always.

In Germany, the IFO indicator for December declined more than expected from 85.7 to 84.7, which can mainly be attributed to lower expectations for the economy. The assessment of the current situation picked up slightly, which was in line with what the comparable PMI survey signalled earlier this week. Overall, soft indicators for the German economy continue to indicate that activity contracted in Q4.

In France, several major banks were downgraded by Moody’s yesterday, following last week’s sovereign rating cut due to the government collapse and the rejection of the 2025 budget. The 10-year French-German government yield spread is currently trading at 80bp, but we see a high likelihood that the spread will go to 100bp early next year.

In the UK, wage growth (excluding bonuses) picked up more than expected from 5.0% to 5.2% y/y in the three months to October. Moreover, payrolls decreased by 35,000 in November, vacancies declined, and the unemployment rate held steady at 4.3% in October. Combined with the stronger than expected PMIs, this week’s UK data releases have so far highlighted why the BoE is set to continue lagging European peers in the easing cycle.

Equities: Global equities were lower yesterday, with a somewhat unusual sector rotation in which consumer discretionary outperformed alongside healthcare. However, the more interesting aspect is the very narrow leadership we have observed recently. To provide a few more examples: the Dow is now down for nine consecutive days, which has not happened in 45 years. At the same time the Nasdaq achieved a record high closing yesterday. Additionally, Tesla has risen in nine of the last ten sessions, significantly contributing to the superior performance of the consumer discretionary sector. The point here is that we have not had any macroeconomic, microeconomic, or monetary policy news that can explain or justify this rotation. However, there is a unique political and CEO situation in the US, coupled with an exuberant market where investors are hunting for winners. In the US yesterday, the Dow declined by 0.6%, the S&P 500 by 0.4%, the Nasdaq by 0.3%, and the Russell 2000 by 1.2%. Asian markets are mixed this morning. European futures are marginally lower, while US futures, including the Dow, are marginally higher.

FI: It was a quiet Tuesday in European rates markets with most of the action in the UK market. The higher-than-expected UK wage figures pushed 10Y GILT yields up by 8bp, while the implied change in the BoE bank rate until end-2025 moved up from -70bp to -55bp. Our forecast is -150bp, leaving substantial downside risk to UK rates for the coming 12 months. EGB yields were close to unchanged across tenors yesterday in line with the UST curve. The 5y5y EUR inflation swap rate moved back to 2%, dropping 3bp throughout the session.

FX: EUR/USD continues to trade close to 1.05 and USD/JPY within 153-154 ahead of tonight’s Fed. Sterling has firmed and cable is back at 1.27, while the antipodeans continue to slide vs the USD. Cable is back at 1.27. USD/CAD has breached 1.43 and takes out new multi-year highs. EUR/SEK has erased some of yesterday’s losses amid poor risk appetite and trades at 11.50, while EUR/NOK has sidelined around 11.75.

Source:  AP

USD: Trump policy pledges to be felt at the FOMC

Our view for today’s Fed rate announcement is that the risks are broadly balanced for the dollar, and we see limited scope for a surprise driving major FX moves. The prospect of fiscal stimulus among other promised policies by US President-elect Donald Trump will, in our view, force some scaling back in expected rate cuts included in dot plot projections as rates are cut by 25bp, matching pricing and consensus. 

Even if the communication nuances end up delivering some sort of dovish surprise, we doubt the Fed will derail from a generally cautious stance on guidance, which inevitably leads the markets’ own (hawkish-implying) expectations for Trump’s policy mix as the main driver for rate expectations. This means that any potential USD correction should not have long legs. Also remember that January is a seasonally strong month for the greenback, and markets may be lured into building strategic bullish USD positions as Trump’s mandate kicks off.

Our baseline view for today is that the modest hawkish readjustment in Fed communication will leave markets content with current pricing for further Fed meetings: a hold in January and around 50% implied probability of a March move. Ultimately, that can leave the 2-year USD OIS at the 4.0% mark and DXY close to 107.0 into Christmas.

EUR: German story to stay soft before turning any better

The latest input to the eurozone’s growth story – another decline in the German Ifo index – should keep market’s dovish tendency in European Central Bank pricing well intact, even if consensus is building that the upcoming German election will generate some degree of fiscal support. Ultimately, a retightening in the very wide Atlantic spread seems unlikely in the near term.

EUR/USD has continued to hover around the 1.050 gravity line, and we see a good chance this will remain the case into the end of the month. Still, we are comfortable with retaining a negative bias on the pair into the new year, where the start of Trump’s second term in office should offer multiple reasons to stay bearish.

In the UK, CPI data released this morning showed increase from 2.3% to 2.6% year-on-year, with the month-on-month slowdown moving from 0.6% to 0.1%, in line with market consensus. Our core services metric, which strips out all the volatile stuff and also rents/hotels (i.e., elements that the Bank of England is less bothered about) did tick higher from 4.5 to 4.7%. Our view on EUR/GBP remains generally flat for the near term, even if an eventual acceleration in BoE easing next year can offer some pockets of support.

BRL: Failing to tackle the problem at source

Despite attempts by the local central bank to get ‘ahead of the curve’ last week with an outsized rate hike, the Brazilian real has remained under heavy pressure. Here, the central bank has been involved in several rounds of dollar selling intervention, including two rounds totalling over $3bn yesterday. Money markets now price BACEN hiking the 12.25%  policy rate above 16% over the next 6-12 months, with the central bank having to do the heavy lifting when it comes to defending the real. Fortunately the central bank has a large stock ($330bn) of FX reserves, and at this stage there are no concerns of lack of available resources to defend the BRL.

However, the source reason for the ongoing BRL sell-off is the fiscal side. Here the suspicion is that the Lula administration will want to keep fiscal policy loose into 2026 elections and will not be swayed by pressure on Brazilian asset markets. Until the government is prepared to come back with some genuine fiscal consolidation it is hard to see the BRL enjoying much of a rebound.

How far could BRL fall? In our last edition of FX Talking we had felt there was outside risk to the 6.50 area. These are difficult times for those with Brazilian assets. However, commodity producers with a cost base in the country now see attractive levels in the one-year outright forward above 6.60.

CEE: Market switched to Christmas mood

As expected, the National Bank of Hungary left rates unchanged yesterday and forward guidance did not see much change either. As in November, one member voted for a rate cut. But at the same time, the press conference tried to introduce a long pause in the cutting cycle. The new forecast showed a slightly higher inflation profile for next year, while the economy will be weaker this year compared to the September forecast.

The NBH found a rather muted market reaction to today's meeting. In line with CEE peers, the EUR/HUF moved up very little after the press conference. The HUF market, like its CEE peers, seems to have already switched into Christmas mode, and with little news coming out of today's NBH meeting, it is hard to expect a big market view. EUR/HUF seems to have stabilised around 408-410 for now.

Today's calendar in the region is empty with several bond auctions on the calendar only, the last of the year. The rates market seems to be dominated by low liquidity and CTA flow, which is driving rates up, especially in the PLN market, which could again deliver some boost to FX. On the other hand, CZK rates seem too aggressively hawkish after a few days of upward movement and closed lower yesterday despite the spike in rates, indicating in turn a weaker CZK into the Czech National Bank's meeting tomorrow.

Key Highlights

Gold failed to clear the $2,725 resistance and corrected gains.

A connecting bullish trend line is forming with support at $2,630 on the 4-hour chart.

Oil prices are struggling to clear the $71.50 resistance.

EUR/USD could decline if it breaks the 1.0450 support level.

Gold Price Technical Analysis

Gold prices remained well-bid near the $2,615 zone against the US Dollar. The price formed a base and started a fresh increase above $2,640 and $2,680.

The 4-hour chart of XAU/USD indicates that the price even climbed above $2,700 but struggled to clear the $2,725 level. As a result, there was a bearish reaction below the $2,700 and $2,680 levels. The price dipped below the 50% Fib retracement level of the upward move from the $2,613 swing low to the $2,726 high.

It even settled below the 100 Simple Moving Average (red, 4 hours) and the 200 Simple Moving Average (green, 4 hours). On the downside, initial support is near the $2,630.

There is also a connecting bullish trend line forming with support at $2,630 on the same chart. The first major support is near the $2,610 level. The main support is now $2,600. A downside break below the $2,600 support might call for more downsides.

The next major support is near the $2,575 level. On the upside, immediate resistance is near the $2,665 level. The first major resistance sits near the $2,670 level.

A clear move above the $2,670 resistance could open the doors for more upsides. The next major resistance could be $2,700, above which the price could rally toward the $2,720 level.

Looking at Oil, there was a decent increase, but the bulls seem to be facing hurdles near the $71.50 level.

Economic Releases to Watch Today

Euro Zone CPI for Nov 2024 (YoY) – Forecast +2.3%, versus +2.3% previous.

Euro Zone CPI for Nov 2024 (MoM) – Forecast -0.3%, versus -0.3% previous.

US Housing Starts for Nov 2024 (MoM) – Forecast 1.340M, versus 1.311M previous.

US Building Permits for Nov 2024 (MoM) – Forecast 1.430M, versus 1.419M previous.

SINGAPORE (Dec 18): Oil prices traded in a narrow range early on Wednesday as investors remained cautious ahead of an expected interest rate cut by the US Federal Reserve, while weighing up the potential supply impact of tighter sanctions on Russia.

Brent futures inched up one cent at US$73.20 a barrel at 0420 GMT, while US West Texas Intermediate crude rose one cent to US$70.08 a barrel.

The market is watching out for clues on interest rate moves for 2025 following the Federal Open Market Committee's (FOMC) meeting, which ends later on Wednesday, analysts said.

"Additional sanctions from the West may limit some losses in today's session, but a cautious tone persists in the lead-up to the FOMC meeting," said Yeap Jun Rong, market strategist at IG.

"Looking ahead, oil prices are likely to remain constrained within their current range, with subdued price action expected to persist through the end of the year," Yeap added.

The Fed on Wednesday is widely expected to cut interest rates for the third time since its policy easing cycle began.

"Projections for rate cuts in 2025 are being second-guessed, especially with Trump planning a comeback on January 20," said Priyanka Sachdeva, senior market analyst with Phillip Nova.

"There is a prevailing narrative that Trump's policies may lead to inflation, which, coupled with concerns about potential interference with the Federal Reserve's autonomy, is causing oil investors to remain cautious," she added.

Lower rates decrease borrowing costs, which can boost economic growth and demand for oil.

Meanwhile, the European Union on Tuesday adopted a 15th package of sanctions against Russia over its invasion of Ukraine, adding an additional 33 vessels from Russia's shadow fleet used for transporting crude or petroleum products. Britain also sanctioned 20 ships for carrying illicit Russian oil.

The fresh sanctions could stoke further oil price volatility though so far they have not succeeded in shutting Russia out of the global oil trade.

In the US, American Petroleum Institute data on Tuesday showed that crude stocks fell by 4.69 million barrels in the week ended Dec 13, a source said. Gasoline inventories rose by 2.45 million barrels, and distillate stocks rose by 744,000 barrels, according to the source.

Analysts projected US energy firms pulled about 1.6 million barrels of crude from storage during the week ended Dec 13, according to a Reuters poll on Tuesday.

The US Energy Information Administration will release its oil storage data on Wednesday.

Source: Theedgemarkets