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.

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.