Canada joined the global political gloom. The sudden resignation of the finance minister on Monday started raising questions about Trudeau’s leadership as politicians there try to find ways to deal with economic slowdown topped by Trump’s tariff threats. Happily for the Bank of Canada (BoC), inflation dropped below the 2% target for the second time in three months hinting that the central bank could at least remain supportive when politicians are not. The USDCAD spiked to the highest levels since the pandemic. The Loonie is now oversold versus the US dollar and retreats very rapidly against the euro since the November peak. Oil prices aren’t adding to the selloff these days, but they are not helping either. As such, the political problems pave the way for further Loonie weakness, price pullbacks in the USDCAD and EURCAD could be interesting opportunities to jump on the trend.

A bit lower on the map, Brazil intervened to stop the bleeding of the real after the currency tanked more than 20% against the greenback to an all-time-low this year. Ballooning debt and deficit are taking a toll on the country’s finances as – remember – not everyone can balloon debt infinitely and make the rest of the world pay for it. This is the major differences between what we call developed countries and their emerging market peers.

Because look, the French National Assembly just adopted a stopgap budget bill to avoid a government shutdown from January as the French politicians took down a government that tempted to control, and to narrow the budget deficit. And yet, the French 10-year yield – though higher on the latest shenanigans – is not alarmingly higher. The outlook for France is not brilliant, however.

Investors in the US have a different problem: the retail sales, there, has again been higher than expected by analysts, again pointed at resilient consumer spending and again highlighted the needlessness of another rate cut from the Federal Reserve (Fed) today. But the Fed will announce a 25bp cut no matter what.

The more the Fed’s rate cuts diverge from economic fundamentals, the stronger the hawkish expectations for the future become. Some expect that the Fed could cut only twice next year while others think that the Fed’s premature and rapid cuts will require a rate hike next year. But I would be surprised to see a meaningful reversal in the Fed’s rate cutting plans at today’s announcement. In the worst-case scenario, Fed officials might signal one fewer rate cut on average for next year. I expect them to stick to the familiar ‘inflation is moving toward target’ rhetoric at this pre-Xmas meeting, paving the way for the Santa rally to unfold.

The S&P500 and Nasdaq eased yesterday as the US 2-year yield shortly spiked to 4.30%, Broadcom retreated nearly 4% but after a 38% rally in the previous two sessions, while Nvidia extended gains in the correction territory. If you are asking when is it a good time to buy a dip in Nvidia, I would say near $120 per share, that matches the 23.6% retracement on the AI rally. It’s still a 7.5% away from yesterday’s close near $130 per share.

In Europe, the Stoxx 600 remains downbeat and is about to test the 500 to the downside, as the Xmas magic is really not operating in Europe this year. The EURUSD hovers between gains and losses around 30 pips around the 1.05 psychological mark. The Fed’s decision will probably give a fresh direction to the pair. A sufficiently accommodative Fed statement and dot plot could give support to the EURUSD and help it to recover above the 1.05 mark – that’s my base case scenario. But if the Fed turns realistically less dovish – both of which is not their thing – we could see the US dollar extend gains and pave the way for a further downside correction in the EURUSD. If that’s the case, the parity bets will rapidly come back to the headlines.

Across the Channel, the figures come in but they are not easy to interpret. Yesterday’s jobs data looked strong with strong employment, low claims and nice earnings growth figures. And along with today’s inflation print dashed the likelihood of another rate cut this week from the Bank of England (BoE). But the private sector shed nearly 200’000 jobs this year – perfectly in contrast with the public sector. It’s obviously not good news for the economy and demands some support from the BoE – a support that the BoE won’t provide easily to balance out the government’s spending plans unless the economy weakens due to tax hikes before it improves thanks to spending. Looking at the chart, we are about to see a death cross formation on the daily chart – where the 50-DMA is about to dive below the 200-DMA – hinting that the selloff could accelerate and send Cable toward the 1.25 on worries that the UK economy will weaken before it rebounds.

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, ING’s FX analyst Francesco Pesole notes.

Fed to hold in January and to move in March

“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 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.”

Source: FXSTREET

AUD/JPY loses ground for the second consecutive session, trading around 97.00 during the European hours on Wednesday. The AUD/JPY cross extends its losses as the Australian Dollar (AUD) faces challenges due to the increased likelihood that the Reserve Bank of Australia (RBA) will cut interest rates sooner and more significantly than initially expected.

On Wednesday, the National Australia Bank (NAB) maintained its forecast for the first RBA rate cut at the May 2025 meeting, though they acknowledge February as a possibility.

The Aussie Dollar remains under pressure due to renewed concerns about China's economy, Australia’s key trading partner, following weak economic data. Chinese Retail Sales missed expectations in November, adding strain on policymakers after President Xi Jinping indicated a desire to boost household consumption last week.

However, the downside of the AUD/JPY cross could be restrained as the Japanese Yen (JPY) struggles as traders seem to be convinced that the Bank of Japan (BoJ) will keep interest rates steady on Thursday.

Japan's Ministry of Finance announced on Wednesday an unexpected improvement in the trade deficit for November, which narrowed to ¥117.6 billion from October's ¥462.1 billion. This improvement was primarily attributed to robust export growth, which rose by 3.8% year-on-year in November, while imports fell by 3.8%.

Japan's trade data pointed to weak domestic demand amid an uncertain economic outlook and concerns about US President-elect Donald Trump's tariff plans are contributors to refraining the Bank of Japan from hiking interest rates.

Source: FXSTREET

Source: Reuters

UK services inflation is stuck. That’s the main takeaway from the latest UK data, even if it was a tad better than most had expected.

Services CPI stayed at 5.0% for the second consecutive month, though only because of a particularly steep fall in air fares. Once we strip that and other volatile categories out, our measures of so-called “core services” inflation ticked higher.

Indeed our favoured measure, which strips out rents and hotel prices amongst other things, ticked up from 4.5% to 4.7%, having generally been performing better than the headline numbers over recent months.

All of this is really just noise. And in fact, services inflation was still a tad higher than the Bank of England’s most recent forecast, even if it was below everyone else's. Bigger picture, we expect it to bounce around 5% for the next four months or so.

Again though, most of that projected stickiness is likely to be concentrated in categories that the Bank of England has told us it is inclined to pay less attention to. Our core services measure described earlier is likely to get pretty close to 3% next spring.

'Core services' is set to fall close in on 3% in the spring

Source: Macrobond, ING calculations

A lot of the services basket is affected by one-off annual changes in index-linked prices – think of things like phone and internet bills. These are often tied to past rates of headline inflation which, through 2024, has been pretty benign. Those annual price hikes for various services should therefore be less aggressive next April than we saw earlier this year.

If we’re right about that, it should also help overall core inflation to fall materially below 3% in the spring (from 3.5% today). Headline CPI is set to stay a little stickier at 2.6-2.7% in the near-term, thanks to less favourable energy base effects.

If 'core services' inflation does look steadily better, then that would provide some ammunition for the Bank of England to move a little faster on rate cuts than markets are now pricing. Our base case is for back-to-back to rate cuts from February onwards, with Bank Rate falling to 3.25% later in the year. 

For the time being though, today’s data means the Bank will stay the course at this week’s meeting. It’ll keep rates on hold and offer no major hints on what’ll come next, beyond re-affirming its commitment to gradual cuts.