Why the Australian Dollar is Poised to Struggle in 2025

Economic

Forex

Summary:

The Australian dollar continues to weaken against the U.S. dollar.

Markets are experiencing significant volatility as central bank policies, economic indicators, and geopolitical developments shape the financial landscape. Recent commentary from Luca Santos of ICI Securities sheds light on how these factors are influencing the U.S. dollar, Federal Reserve policy, and the Australian dollar.

Federal Reserve's Path Forward

The Federal Reserve has indicated a continuation of rate cuts, though potentially at a slower pace than previously anticipated. Markets are projecting a 25-basis-point cut in December, with further adjustments in early 2025. However, there is speculation that cuts could pause or taper as the Fed assesses inflation, which remains higher than in Europe. This cautious approach reflects the Fed’s balancing act between sustaining economic growth and managing inflation risks.

The divergence between the Fed and the more dovish European Central Bank has contributed to a stronger U.S. dollar. This trend is also supported by geopolitical uncertainties, including the anticipated influence of the incoming Trump administration.

Pressures on the Australian Dollar

The Australian dollar continues to weaken against the U.S. dollar, trading around 64–65 cents. Analysts predict it could fall further to 62 cents in the first quarter of 2025. Key factors driving this decline include a contracting Australian GDP and the Reserve Bank of Australia's (RBA) reluctance to cut interest rates. While some central banks are actively reducing rates, the RBA has maintained a cautious stance, citing persistent inflation and resilient consumer spending.

Despite high interest rates, Australians have been drawing on savings to support property purchases and spending, complicating the RBA’s efforts to cool inflation. This dynamic, coupled with weaker-than-expected GDP growth, leaves the Australian economy in a challenging position.

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Justin

Economic

Forex

The NZD/USD pair faces some selling pressure to around 0.5805 during the early European session on Monday. The renewed US Dollar (USD) demand and discouraging Chinese consumer inflation undermine the pair. The US November Consumer Price Index (CPI) report will be the highlight on Wednesday.

China's CPI inflation hit a five-month low in November, indicating that Beijing's recent measures to boost weakening economic demand are having little impact, weighing on the China-proxy New Zealand Dollar (NZD) as China is a major trading partner to New Zealand.

Additionally, the potential fresh tariffs from US President-elect Donald Trump might create a headwind for NZD/USD. On Monday, Fitch Ratings lowered its economic projections for China for 2025 to 4.3% from 4.5%, citing risks of even higher US tariffs on Chinese goods.

On the USD’s front, Federal Reserve (Fed) officials appeared on track to lower its interest rates in the December meeting after data showed the US labor market remained solid but continued to cool in November. According to the CME Group's FedWatch Tool, markets currently see an 85.1% possibility of a 25 basis points (bps) rate cut this month.

With a quarter-point rate cut by the US central bank next week a near certainty as per market pricing, analysts believe the Greenback might face some profit-taking after its long run-up in the four weeks since Donald Trump won the US Presidential election. This, in turn, might cap the downside for the NZD/USD pair.

However, traders will focus on the US inflation report on Wednesday for fresh impetus. "The inflation read may determine if we will have a hawkish cut from U.S. policymakers next week, which could still see the U.S. dollar stronger if the Fed were to set the stage for a pause in the rate-cutting process into early 2025," said IG market strategist Yeap Jun Rong.

Source: FXSTREET

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Daily News

Economic

[Quick Facts]

1. Syrian rebels topple President Assad.

2. South Korea's ruling party head says President Yoon Suk Yeol will not engage in state affairs ahead of his impending resignation.

3. Polls show Germany's conservatives could govern with the Greens.

4. UK's job vacancies see the largest drop in four years.

5. US non-farm payrolls rebound significantly.

6. US consumer confidence index hits its highest level since May.

[News Details]

Syrian rebels topple President Assad

Syrian rebels ousted President Bashar Assad and seized control of Damascus on Sunday, forcing him to flee and ending his family's decades of rule after more than 13 years of civil war in a seismic moment for the Middle East. This development has dealt a significant blow to Assad's allies, Russia and Iran, and their influence in the region. The Syrian Rebel Alliance stated on Sunday that efforts are underway to complete the power transfer to a transitional governing body with full administrative authority.

South Korea's President Yoon Suk Yeol will not engage in state affairs ahead of his impending resignation

South Korean President Yoon Suk Yeol survived an impeachment vote in parliament on Saturday. The head of South Korea's main opposition Democratic Party announced plans to reintroduce the impeachment motion during an extraordinary parliamentary session on Wednesday, December 11.

South Korea's Prime Minister Han Duck-soo and People Power Party leader Han Dong-hoon held talks on the country's political situation on December 8. Han Dong-hoon said that the majority of the public believes the president should resign, adding that Yoon Suk Yeol will not engage in state affairs ahead of his impending resignation.

Polls show Germany's conservatives could govern with the Greens

Germany's conservatives and Greens would have a majority to form a government after the snap election in February, according to a new opinion poll published Saturday.

The two parties would have a combined 44% representation, the latest Insa survey for Bild am Sonntag newspaper showed. The Free Democrats, meanwhile, would miss the 5% threshold for getting into parliament as their backing fell one percentage point to 4% from last week.

UK's job vacancies see the largest drop in four years

Vacancies recorded the steepest decline since August 2020, driven by a fall in permanent positions, according to the Recruitment & Employment Confederation (REC) and KPMG. The drop in vacancies, coupled with an increase in available workers, has kept wage growth at its lowest since 2021.

This report is one of the clearest signals yet that the £40 billion ($50.9 billion) tax hike announced by UK Chancellor Rachel Reeves on October 30 is suppressing hiring activity. Employers are bearing the brunt, facing not only a 6.7% increase in the minimum wage but also a 1.2-percentage-point rise in payroll taxes since April.

"Businesses are having to weigh up the prospect of increasing employee costs following the Budget, which has led to an accelerated slowdown in hiring activity across the board, said Jon Holt, Group Chief Executive and UK Senior Partner KPMG. The Bank of England is closely monitoring the REC survey, paying attention to the budget's impact on hiring, wages, and consumer prices to assess whether adjustments to its "gradual" approach to interest rate cuts are necessary.

US non-farm payrolls rebound significantly

US non-farm payrolls saw an increase of 227,000 jobs in November, compared to October's 36,000, with the unemployment rate rising to 4.2% from October's 4.1%. Key contributors to job growth included the education, healthcare, leisure, and hospitality sectors. As strikes at major companies like Boeing ended, and disruptions from hurricanes subsided, job growth in manufacturing, transportation and warehousing, as well as professional and business services sectors, turned from negative to positive. However, since Black Friday occurred late in November, the associated employment gains were not captured in the November data, possibly contributing to a sharper decline in retail employment growth.

The data revealed a significant increase in employment, likely fueled by the resolution of temporary disruptions from hurricanes and strikes that occurred in October. However, it is worth noting that the unemployment rate rose to 4.246% in November, approaching the year's peak of 4.253% in July. The number of people unemployed for 15 weeks or more also continued to trend upward. Meanwhile, with a slight decline in the labor force participation rate and unchanged average working hours, the month-over-month growth in average hourly earnings slowed, possibly indicating weakening conditions on both the supply and demand sides of the labor market.

Given that Federal Reserve Chair Jerome Powell recently said that monetary policy decisions would depend on economic trends, the marginal increase in unemployment suggests the Fed may still consider a rate cut in December.

US consumer confidence index hits its highest level since May

The University of Michigan's Consumer Confidence Index rose to 74.0 in December from 71.8 in November, exceeding market expectations of 73.0.

One-year-ahead inflation expectations increased to 2.9% in December from 2.6% in November, the highest in six months, while long-term expectations fell slightly to 3.1% from 3.2%.

A surge in buying conditions for durables led Current Economic Conditions to soar more than 20%. Rather than a sign of strength, this rise in durables was primarily due to a perception that purchasing durables now would enable buyers to avoid future price increases.

[Today's Focus]

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Central Bank

Economic

RBA to hold rates, but will it turn less hawkish?

The Reserve Bank of Australia will kick off the central bank bonanza next week, announcing its decision on Tuesday. Unlike its major peers, the RBA has not yet embarked on a rate-cutting cycle as policymakers remain wary about inflation despite the recent decline.

Governor Michelle Bullock said underlying inflation is still “too high” in recent remarks and doesn’t expect for it to return to target sustainably until 2026. Unless that outlook changes, the RBA isn’t about to ditch its ‘higher for longer’ stance anytime soon, and investors don’t see a rate cut before April 2025.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_1

Even April was considered a bit optimistic prior to the GDP data that showed Australia’s economy grew by slightly less than forecast in the third quarter. The soft reading undermines Bullock’s claim about the level of excess demand in the economy. Monthly CPI was also weaker than expected in October, and further downside surprises could see the timing of the first rate reduction being brought forward again.

This may prompt Bullock and other board members to sound a little more upbeat about inflation as they keep rates at 4.35%. A dovish lean could push the Australian dollar below the four-month lows brushed on the back of the GDP print.

Aussie traders will also be keeping an eye on the November employment report due on Thursday, as well as CPI and PPI figures out of China on Monday, and November trade figures on Tuesday.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_2

Whilst the Chinese data will be important in gauging the health of the world’s second largest economy, a bigger market mover might be any new announcement on stimulus, as political leaders meet next week to set out Beijing’s economic plan for 2025.

Will the BoC cut by 50 bps again?

In sharp contrast to the RBA, the Bank of Canada has been taking the lead in the global race to cut rates. The BoC has slashed rates four times this year, the last being a hefty 50 basis points. But investors are split if another double cut is likely in December.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_3

Both headline and underlying measures of inflation ticked up in October, and the jobs market is rebounding after a soft patch. On the other hand, growth remains subdued and businesses are downbeat about the outlook, especially now that US president-elect Donald Trump is threatening tariffs of 25% on all Canadian imports.

Another consideration for the BoC is the widening yield spread with the US, as the Fed has not been as aggressive and may even go on pause soon. With the Canadian dollar already down more than 6% this year, policymakers may not want to risk lowering rates significantly below US ones.

Hence, Wednesday’s decision of whether to cut by 25 bps or 50 bps will likely be a very close call, and the risks to the loonie are symmetrical.

Dollar awaits CPI data as Fed meeting looms

The December policy decision is also proving to be a bit of a dilemma for the Federal Reserve. Judging by the latest rhetoric, most Fed officials appear to be in favour of a 25-bps reduction at the December 17-18 meeting but are not ready to commit just yet.

The CPI report for November out on Wednesday will be the last major piece of the jigsaw for policymakers ahead of the meeting, so a strong market reaction is almost guaranteed.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_4

The headline rate of CPI is expected to edge up from 2.6% to 2.7% y/y, while core CPI is projected to stay unchanged at 3.3% y/y. Barring any upside surprises, the Fed will probably be inclined to lower rates and keep the January meeting as an option for pausing.

The producer price index will follow on Thursday.

The US dollar is consolidating after hitting two-year highs in November. Any unwelcome acceleration in the month-on-month rates could recharge the bulls to drive the dollar index to fresh highs.

SNB set for first cut under dovish new Chairman

The Swiss National Bank has trimmed rates three times since March when it became the first of the major central banks to ease policy. It’s widely expected to cut again in December, which will be new Chairman Martin Schlegel’s first decision since taking over from Thomas Jordan in October.

However, the size of the cut is less certain, and the choice between 25 bps or 50 bps was looking like a coin toss until the October CPI data came along. Switzerland’s annual CPI rate increased by 0.7%, falling short of the 0.8% expected. The odds for a 50-bps cut subsequently rose to more than 60%.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_5

Dovish remarks by Schlegel have further boosted the chances for a larger reduction, after he repeatedly floated the idea of reintroducing negative interest rates if necessary.

Should the SNB opt for a 50-bps cut on Thursday, the Swiss franc could resume its downfall against the US dollar. However, if policymakers stick with a 25-bps increment, the franc could extend its latest recovery.

ECB unlikely to go big in December

Soon after the SNB announces its policy settings, the European Central Bank is expected to hit the headlines with its rate decision. A rate cut is almost certain, with economists predicting a 25-bps reduction. However, some investors think that a 50-bps cut is on the cards, although the odds have fallen in recent days to about 15%.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_6

This has helped the euro to stabilize a little against the US dollar as ECB policymakers, including President Lagarde, have been careful not to pre-commit to a particular rate path amid a pickup in inflation in the euro area.

Nevertheless, a weak economy and renewed political uncertainty in both France and Germany have some traders betting that the ECB will have to be a lot more aggressive with its policy easing in the coming months.

However, it’s unlikely that the ECB will change its stance just yet and if it cuts rates by 25 bps as forecast on Thursday, the euro may not move much unless there is some unexpectedly dovish language by Lagarde in her post-meeting press briefing on Thursday that spurs a fresh selloff.

Pound rebounds ahead of UK data

Across the channel, the uncertainty over the UK economic outlook has also risen, mainly on the back of the Labour government’s budget. The tax and spend budget has been widely perceived as boosting inflation, limiting the scope for the Bank of England to cut interest rates. And whilst it does include measures that could lift growth, in the immediate term, the British economy appears to have stagnated.

GDP numbers for October will therefore be closely watched on Friday for signs that growth is coming out of the doldrums.

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too_7

Although sterling has recouped a decent portion of its recent losses against the greenback, stronger-than-expected growth data could help it extend the gains.

Elsewhere, the yen might be sensitive to any revisions to Japan’s Q3 GDP print on Monday and any surprises in Friday’s quarterly Tankan business survey amid ongoing speculation about whether or not the Bank of Japan will hike rates at its December meeting.

Source:XM

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Owen Li

Economic

One of the most damaging economic effects of Brexit is the loss of access to financing in the UK by the European Investment Bank, the world’s largest multilateral financial institution. During the UK’s European Union membership, the EIB invested some £150bn into UK projects, mainly in large-scale infrastructure, including the Channel Tunnel, the Second Severn Crossing, the Manchester Metrolink Extension, the water industry and rail track renewal across most regions of the country.

Since the 1997 Amsterdam Treaty, the EIB has also extended lending to projects in ‘human capital’ such as schools, universities, hospitals and social housing. More recently, it has rebranded itself as the ‘EU’s climate bank’, with the aim of dedicating 50% of its investments to climate action and environmental sustainability.

In 2016, the last year of full UK EU membership, the EIB lent £7.5bn to the UK. Since the bank, on average, lends about a third of total project cost – to act as a catalyst to other long-term joint lenders – this sum represents two to three times the total project investment involved.

The Chancellor of the Exchequer placed heavy emphasis on economic growth in the October 2024 budget and the investment necessary to achieve this. One of the principal instruments was the creation of a new National Wealth Fund of £7.3bn of which £5.8bn would be committed over the current Parliament in support of the newly created UK Infrastructure Bank. The government’s aim is that this, together with the recently established Development Bank of Wales and the Scottish National Investment Bank, will replace the investment that previously came from the EIB. This is highly ambitious.

While the NWF will provide an important new stimulus, the amounts lent by the new development banks combined are only a fraction of the annual EIB average from 2009 to 2016. The UKIB lent only £0.8bn against a target of £1.5bn in 2022. It lacks both the financial, engineering and market expertise that the EIB has built up over many years and critically, the EIB’s much larger access to the world’s capital markets.

As for the new Welsh and Scottish banks, their potential is limited. Not only are they not allowed to borrow on the capital markets, but they are also restricted to investing the annual amount they receive from the government.

Since the UK has left the EU, it no longer has automatic access to EIB lending. Moreover, Prime Minister Keir Starmer has stated that there will be no reversal of Brexit – ruling out re-entry to the single market and/or customs union – in his lifetime. Under its statutes, however, the EIB can and does, with the agreement of its governing bodies, lend for projects in non-EU member states. Such investment has amounted to only a small proportion of its total lending, and historically much of it took place in former French and British colonial territories, such as under the Lome Convention.

From the 1990s, however, substantial lending programmes were launched in a number of central and eastern European countries who were aspiring to EU membership. Legally, therefore, there is no bar to resume EIB lending in non-member UK if political agreement could be reached to this.

The attainment of such agreement would clearly be very difficult, to put it mildly. The EU is averse to ‘cherry picking’ and there would undoubtedly be a serious price to pay on the UK’s side. But the UK government is committed to a ‘reset’ of its trade and investment relationship with the EU and surely, at a time when likely global developments mean that we must move back closer to the EU, the possibility of at least some resumption of sorely needed EIB investment in the UK is worth setting as a negotiating aim. I am sure that the EIB, which still employs British staff and knows the British market very well, would itself much welcome such a development.

Source:Brian Unwin

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CEPR

Economic

Banks’ funding inflows and outflows can be volatile. They therefore keep a buffer of liquid assets, including bank reserves, on their balance sheets to ensure they can cope with high outflows without having to either borrow at an expensive interest rate (Bianchi and Bigio 2022) or sell illiquid assets (Drechsler et al. 2018). But can we think of episodes such as the global financial crisis as being the result of unluckily high funding outflows hitting banks?

In a recent paper (Porcellacchia and Sheedy 2024), we model the source of volatility in bank funding. To do so, we adopt the viewpoint of a literature started by Diamond and Dybvig (1983): banks are vulnerable to waves of pessimism that might trigger a bank run. Pessimism about banks is self-fulfilling because it reduces their access to funding, forcing them to sell illiquid assets at a loss. This, in turn, confirms investors’ pessimistic expectations about banks’ financial performance. The possibility of self-fulfilling pessimism poses a coordination problem for investors in bank assets. But what is it that makes investors coordinate on pessimism?

Goldstein and Pauzner (2005) show that, under a minor deviation from perfect information, banks’ balance sheet fundamentals determine the likelihood of pessimism arising. This is the approach we take to the coordination problem. We find that pessimism is more likely to hit banks with small liquidity buffers because they are more fragile, so a small number of pessimistic investors is enough to force such a bank to sell illiquid assets and start the vicious cycle of self-fulfilling pessimism. To guard against this, banks increase their demand for liquid assets to reduce their fragility and stem waves of pessimism.

The mechanics of pessimism

Adverse economic shocks are a driver of waves of pessimism in the model. This is because banks’ net worth – the difference between the value of their assets and debt liabilities – plays a similar role to their liquidity buffers in determining fragility, and banks’ net worth is highly exposed to the performance of the economy. In other words, banks with low net worth are more likely to be caught in a wave of pessimism, and in bad times banks make losses that reduce their net worth. This is in line with a common narrative about the events that unfolded during the global financial crisis: banks began finding it hard to obtain funding after an unexpected collapse in house prices that reduced their net worth.

An increase in the likelihood of pessimism raises banks’ funding costs and hence amplifies the macroeconomic effects of shocks to the economy. Investment in the economy is crucially dependent on bank credit. If banks are starved of funds as a result of pessimism, they supply less credit and so investment takes a hit. Quantitatively, pessimism increases the effect on economic output of a shock to the value of bank assets by about one-third on impact. Pessimism also makes the effects of shocks last longer. This propagation of shocks through time is due to the negative impact of more expensive funding on banks’ return on equity. With a low return on equity, it takes a long time for banks to build their net worth back up.

In the model, banks respond to adverse economic shocks by increasing their demand for liquid assets in an attempt to reduce their fragility and thereby stem pessimism. Unless the supply of liquid assets is perfectly elastic, this behaviour means that the prices of liquid assets increase in bad times. Evidence for this behaviour is provided in the left panel of Figure 1, which plots interest rate spreads during the global financial crisis. In this period both the funding spread, which measures funding costs for banks, and the liquidity premium, which measures the cost of holding liquid assets, were very high. The right panel shows that expensive bank funding is generally associated with expensive liquidity, suggesting that this mechanism operates broadly, not just in financial crises.

The Macroeconomic Effects of Liquidity Supply During Financial Crises_1

Liquidity policy

The role of policy in the model is to supply liquid assets, such as bank reserves. So we can use our framework to analyse the macroeconomic effects of liquidity policy. We find that an expansion in the supply of liquid assets is beneficial in the short run because it boosts banks’ liquidity buffers. This makes pessimism less likely and thereby reduces the cost of funding for banks. Lower funding costs are passed through in the form of lower bank lending rates, thus increasing investment and GDP. Figure 2 shows the effects of a persistent increase in the supply of liquid assets that reduces the liquidity premium by 15 basis points on impact and is slowly unwound over time. On impact, the funding spread is reduced by 30 basis points, leading to an increase in investment of about 2%.

The Macroeconomic Effects of Liquidity Supply During Financial Crises_2

We provide empirical evidence for the effectiveness of liquidity policy by studying the causal effect of the liquidity premium on banks’ funding spread. The positive correlation between the liquidity premium and the funding spread in the right panel of Figure 1 is not evidence of causality because the liquidity premium is not an independent random variable. To deal with this endogeneity problem, we use data on US Treasuries, a key liquid asset. Crucially, US Treasuries are issued after their auction with a lag of a few days. Hence, their outstanding quantity is predetermined at daily frequency and cannot possibly react either to the funding spread or to other drivers of the funding spread. With this in mind, we use the stock of outstanding US Treasuries as an instrument for the liquidity premium, essentially narrowing our focus to daily variation in the liquidity premium induced by changes in the outstanding stock of US Treasuries. And we find a significant positive effect, suggesting that the liquidity premium is indeed a causal driver of banks’ funding costs.

The model implies that it is beneficial to supply public liquidity, such as bank reserves, elastically. When an adverse shock hits the economy, banks come under stress. Their demand for liquid assets increases, thereby pushing up the liquidity premium. By supplying extra bank reserves in response to this, the central bank can contribute to the stabilisation of the economy.

Conclusion

An important literature in finance formalises the idea that banks are exposed to the risk of bank runs. We take the methods described in the literature and adapt them so that bank runs can be integrated into a standard model used to study business cycles. This allows us to study the role of run risk in amplifying and propagating the business cycle and the role of policy in dampening it.

In this column, we focus on liquidity policy, but there are more dimensions of policy that we can study with our framework. The discount window, through which the central bank acts as the lender of last resort, and deposit insurance are important policies for financial stability and we analyse the effects of these in the paper.

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Pepperstone

Economic

Looking ahead, it seems somewhat unlikely that these themes will significantly shift moving into 2025, at least not in the early part of the year.

In terms of economic growth, risks to the eurozone outlook remain firmly tilted to the downside, while also being incredibly numerous in nature. From a geopolitical perspective, tensions in the Middle East, as well as the ongoing war in Ukraine, are both likely to pose relatively stiff headwinds, particularly with a sustainable resolution to either conflict seemingly not on the cards at present.

Meanwhile, the continued lack of a significant economic recovery in China will likely also pose significant headwind to the bloc, with the manufacturing and luxury goods sectors remaining the most exposed. While further Chinese fiscal stimulus is likely in 2025, measures thus far have been focused on providing support to financial markets, as opposed to putting a much-needed floor under the ‘real’ economy.

With this in mind, the economic outlook remains a dour one, with all three of the PMI surveys now residing firmly in contractionary territory, in the short term things could get worse before they get better.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_1

Presenting further downside risks is the bloc’s political backdrop, which has soured significantly in recent weeks.

Next year, in February, Germany will head to the polls, after the recent collapse of the current governing coalition. While the SPD are unlikely to be returned as the largest party, there is every chance that they feature once again in a new coalition, likely led by the CDU, particularly if parties see a need to join another multi-party government in order to prevent the far-right AfD from achieving power. Nevertheless, the lead up to, and likely protracted negotiations after, the election will result in effective governmental stasis over the short-term.

Meanwhile, in France, the political backdrop is similarly tumultuous. PM Barnier’s decision to force through a Budget encompassing €60bln of spending cuts and tax hikes has led to a no confidence motion being tabled, which is near certain to pass. The likely toppling of the government, however, shan’t immediately trigger fresh elections, which can’t be legally held for another 12 months. Hence, further legislative logjam is likely, as the budget deficit continues on a path towards a whopping 6% of GDP, double the EU’s ostensible limit.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_2

The dismal growth, and uncertain political, backdrops create something of a headache for ECB policymakers, who continue to lower rates in relatively predictable fashion, back towards neutral.

As is always the case, precisely estimating the neutral rate is a near-impossible task, though said rate is likely around 2% in the eurozone. With policymakers so far showing little desire to deviate from the current path of cutting by 25bp at every meeting, neutral is likely to be achieved next April. Consequently, debate among policymakers and market participants alike is set to turn to whether the ECB need lower rates below neutral, into outright ‘loose’ territory.

Such a scenario seems likely at present, not only in an attempt to prop up growth, and to somewhat insulate the bloc from political uncertainties, but also due to faster than expected disinflation, as price pressures return towards the ECB’s 2% target.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_3

Though headline CPI ticked higher to 2.3% YoY in November, per the ‘flash’ reading, said increase was largely due to an increase in wholesale and consumer energy prices, which policymakers should look through. Instead, Lagarde & Co will continue focusing on core CPI, which rose 2.7% YoY over the same period, its joint lowest level since February 2022.

Risks, however, on the inflation front, appear firmly tilted towards a potential undershoot of the inflation aim, particularly as the economy continues to lose momentum, with recent weakness in the manufacturing sector now also becoming increasingly evident in the all-important services sector too.

Perhaps the biggest risk to the inflation, and growth, outlooks comes from the potential for another tit-for-tat trade war with the US. Incoming President Trump’s preference to impose tariffs apparently on a whim in order to bring trading partners to the negotiating table is well known, with China, Canada, and Mexico having already faced Trump’s ire, well before inauguration day.

It would be logical to expect that the EU become Trump’s next target, likely posing a further headwind to growth, but also bringing with it the possibility for a resurgence in price pressures, thus leaving ECB policymakers to grapple with a potentially stagflation-esque macro backdrop, particularly when the EU’s political leadership vacuum means any potential trade war is set to be prolonged.

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come_4

At face value, none of this is particularly positive for eurozone assets. However, the key question with which market participants must grapple next year is one of when sentiment surrounding the bloc reaches a point of ‘peak pessimism’. A tell-tale sign of such a scenario would be stretched short positioning, and a blow-off bottom in the EUR/USD.

Were such a scenario to come to pass, it would evidence a market that has priced an adequate degree of risk and negative catalysts, and one that would no longer be as sensitive to incoming pessimistic news flow as seen in 2024. One would expect that such a ‘peak pessimism’ point is reached before EUR/USD falls to parity, at which point the aforementioned crowded positioning would likely spark a rebound as shorts unwind. A potential scenario under which this could occur may come as a result of more substantial ECB easing being seen to underpin economic growth, and/or as a potential trade war fails to escalate to as significant a degree as markets currently expect.

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Why the Australian Dollar is Poised to Struggle in 2025

Federal Reserve's Path Forward

Pressures on the Australian Dollar

Nzd/usd Attracts Some Sellers To Near 0.5805 As China’s Deflationary Pressure Persists

Source: FXSTREET

December 9th Financial News

[Quick Facts]

[News Details]

[Today's Focus]

Week Ahead – Central Bank Bonanza Begins, US CPI Eyed Too

RBA to hold rates, but will it turn less hawkish?

Will the BoC cut by 50 bps again?

Dollar awaits CPI data as Fed meeting looms

SNB set for first cut under dovish new Chairman

ECB unlikely to go big in December

Pound rebounds ahead of UK data

Source:XM

UK Infrastructure Bank’s ambitious aim to replace EIB investment

Source:Brian Unwin

The Macroeconomic Effects of Liquidity Supply During Financial Crises

The mechanics of pessimism

Liquidity policy

Conclusion

2025 Outlook: Eurozone – Questioning When ‘Peak Pessimism’ May Come

Risk Disclosure