European Central Bank Heads for Last Rate Cut of Year — but Jumbo Move Seems off the Table

Central Bank

Summary:

The European Central Bank is widely expected to deliver a 25-basis-point rate cut on Thursday, rather than a "jumbo" 50-basis-point move previously thought to be on the table.Economists nevertheless say downside risks to the euro zone economy and the inflation picture have both increased, set to send the central bank on a faster course of monetary loosening in 2025.Macro forecasts broadly are citing high uncertainty around the policies of U.S. President-elect Donald Trump.

The European Central Bank is heading for its final interest rate cut of the year on Thursday — and while the institution is expected to stick to a quarter rather than half-percentage-point trim, economists forecast that a faster pace of monetary loosening lies ahead.

It will still be a crucial meeting to set guidance for the year ahead, not least because ECB staff will release their quarterly macroeconomic projections on growth and inflation. Those forecasts will factor in the highly uncertain global impact of Donald Trump's return to the White House and of his threats of sweeping trade tariffs.

The bloc's central bank has so far lowered its key rate from 4% to 3.25% this year across three 25-basis-point increments between June and October.

The possibility that the ECB could opt for a 50-basis-point cut to round off 2024 seemed firmly in play after the latest autumn meeting, with multiple policymakers telling CNBC that they would remain data-dependent, but that a significant slowdown in euro area inflation and a worsening economic outlook for the bloc could warrant a big move in December.

Money market pricing now suggests little chance of a jumbo trim. As of Wednesday morning, around 29 basis points' worth of cuts had been priced in for December, and economists say the November uptick in negotiated wage growth will warrant caution.

Headline inflation rose back above target in November, climbing to 2.3% from 2% in October. The euro zone economy meanwhile grew at its fastest pace in two years in the third quarter, albeit only at a rate of 0.4%.

"There is no need to hurry up at this stage for the ECB," Sylvain Broyer, chief EMEA economist at S&P Global Ratings, told CNBC's "Squawk Box Europe" on Monday.

"Inflation, at least over the short term, is under control. But as long as labor costs increase above productivity, the ECB should remain on the cautious side, or on the wait-and-see side for cutting rates."

This is likely to translate into a 25-basis-point cut in December, Broyer said, followed by rate reductions at a "quick pace" to take monetary policy to a neutral stance that neither restricts nor stimulates growth.

'Heavy lifting'

Several forecasts see that pace as meaning 25-basis-point cuts at all six of the ECB's meetings in 2025 up to September, taking its key rate — the deposit facility — from 3% to 1.5% as a result.

That includes researchers at Denmark's Danske Bank, who said in a Tuesday note that ECB policymakers would discuss a 50 basis point cut at the December meeting, but would ultimately settle on a smaller move.

They added that they expected a "benign market reaction," even if ECB President Christine Lagarde shifts her messaging in a more dovish direction.

Bank of America Global Research on Tuesday updated its forecast from a pace of rate cuts taking the deposit facility to 2% by June next year, to a clip leading the rate to 1.5% by September.

"With an economy that will be growing at or below trend for most of 2025, we think it will be hard for the ECB to skip a meeting until the [deposit facility] falls slightly below where it sees the neutral rate (2%), to where we see it (1.5%)," BofA strategists said, referring to that middle ground of monetary policy.

The geopolitical backdrop is a key reason for these more dovish 2025 outlooks.

The ECB is bracing for a year of "heavy lifting" to support dwindling euro zone growth, while political instability in the leading German and French economies sends bond yields in these key regions higher, Carsten Brzeski, global head of macro for ING Research, said at an event sharing his 2025 outlook last week.

Under Trump, the U.S. is set to cannibalize the flow of funds into crucial sectors by cutting taxes, deregulating and attracting investment from Europe, Brzeski said, noting that this could be more damaging to the euro zone economy than tariffs. But macro forecasts, including Brzeski's, are broadly citing high uncertainty around what policies Trump will actually deliver.

"Southern European economies will continue to benefit from a post-pandemic tourism boom, and they don't need to compete with Chinese manufacturing. But the first half of the year is also going to be a standstill politically in Germany and France," Brzeski said.

A potential upside surprise for the euro zone could deliver a delayed impact from the recent growth in real incomes and savings, providing strong support for the economy across 2025, Brzeski continued. Conversely, his downside "bold call" envisions Europe lurching toward its own protectionist measures as a backlash to Trump's provisions, "plunging global goods trade into a full-blown trade war."

Source:CNBC

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Justin

Commodity

Crude Oil trades higher for a third consecutive day on Wednesday, but it is unable to really bank on the escalating situation in the Middle East as traders appear to be slashing their exposure ahead of the end of the year. The news that the US is mulling additional Oil embargoes for Russian production did not help either, as it has the potential to weigh on prices.

The US Dollar Index (DXY) – which measures the performance of the US Dollar (USD) against a basket of currencies – is trading steady ahead of the US Consumer Price Index (CPI) data from November set to be released on Wednesday. The Federal Reserve (Fed), which remains data-dependent until further notice, will look at the inflation gauge to assess whether an interest-rate cut at next week’s meeting is appropriate. Higher-than-expected inflation could be enough for the Fed to halt its rate-cutting path and keep rates steady going into 2025.

At the time of writing, Crude Oil (WTI) trades at $69.01 and Brent Crude at $72.73.

Oil news and market movers: Mulling and reporting

OPEC+ will release its monthly OPEC report this Wednesday. Not many new elements are expected given that OPEC+ already extensively communicated its intentions last week, when it confirmed its three-month delay for its production normalization to April 2025.

Saudi Aramco's Oil price cut for January deliveries to Asian buyers -- which account for most of its exports -- reinforces the outlook for soft market fundamentals in the first half of 2025, Reuters reports.

Falling CFTC speculative net-long positions in Oil futures are the result of traders slashing their risk exposure as they fret over the outlook of the US shale industry during President-elect Donald Trump’s second term and the response from OPEC+, Bloomberg reports.

The Biden administration is weighing new and tougher sanctions against Russia’s Oil trade in order to tighten the screws on the Kremlin just weeks before President-elect Donald Trump returns to the White House, Bloomberg reports.

The Energy Information Administration (EIA) is set to release its weekly Crude Stockpile Change report at 15:30 GMT. Expectations are for a drawdown of 1.3 million barrels against the more than 5 million barrels drawdown seen the prior week.

Oil Technical Analysis: Long term outlooks remain key

Crude Oil price is wrong-footed again, facing more downside than upside despite heightened tensions in the Middle East. Traders are instead slashing their positions in Crude Oil and look beyond the near-term bullish drivers, looking forward to the rather bearish silver lining once President-elect Trump takes office. Trump has promised to ramp up Oil production even more, which would weigh on prices.

The 55-day Simple Moving Average (SMA) at $69.96 is the first big resistance level to look out for on the upside. Should tensions in the Middle East flare up further, $71.46 with the 100-day SMA at $71.25 will act as thick resistance. In case Oil traders can plough through that level, $75.27 is up next as a pivotal level.

On the other side, traders see $67.12 – a level that held the price in May and June 2023 – as the last man standing. In case that breaks, the 2024 year-to-date low emerges at $64.75 followed by $64.38, the low from 2023.

US WTI Crude Oil: Daily Chart

Source: FXSTREET

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ING

Economic

The oomph coming out of the US has manifested in wider spreads across the board

Even though market rates have been trending lower into the turn of the year, the dominant theme following the first Fed rate cut in September has been a material ratchet higher in US market rates. This reflected: 1. A firm September payrolls report, 2. An edge higher in some inflation metrics, and 3. The discount and delivery of a Trump election win. This also acted to downsize expected Fed rate cuts, while at the same time macro malaise in the eurozone and elsewhere upsized expected cuts there. Consequently, spreads to the US marched materially higher, coinciding with US dollar strength.

Not only has there been a widening in spreads in the past number of weeks, but spreads are significantly wider versus their 5yr averages. For example, in the 5yr area, eurozone spreads are 50bp wider versus the 5yr average, Canada is 100bp wider, and Japan is 80bp wider, to name a few. The latest absolute spreads are identified in the table below using risk-free rates (where available), where positive spreads are pick-ups to SOFR rates. The question now is where we are going to go from here.

The simple answer is spreads are liable to remain wide as a theme through 2025, with, if anything, a bias to widen further. The central antagonist here is the Trump administration and the reaction to it, from the Federal Reserve and international players of all guises. The Fed’s first issue centres on the stimulative effect coming from proposed tax cuts, which will go through a legislative process in 2025 for full enactment from January 2026. To the extent that the tax cuts include ending taxes on tips, overtime and social security, there is a stimulative effect on the type of consumer that has a high propensity to spend.

The wide gaps that have opened up between low yielders and the US

Spreads to the US to Widen for Most of 2025_1

Tariff price risks are an additional factor, while the eurozone simultaneously goes through macro malaise

An additional concern is the tariff policy. While we remain far from a settled outcome on this, there are some key observations to be made. First, US imports are less than 15% of US GDP. In that sense, they are not dramatically impactful. Second, low import propensity also reduces the size of the impact of tariffs on average economy-wide prices. Third, there is still a likely price rise/inflation effect to be concerned with, and likely something to watch for in 2026, and perhaps through late 2025. We simulate an aggregate price impact of something like 0.5% to 1% on a broad 10% tariff.

This may or may not be 'inflationary', but US market rates will find it hard to avoid discounting the price risk coming from the tariff story. Essentially, we have a tax-cutting/tariff combination that will concern longer tenor rates, specifically to the extent that these price rises eat into the value of a fixed rate coupon paid out on any given bond. This also limits the appetite for the Federal Reserve to cut by too much as we move through 2025. That’s the argument for US market rates remaining elevated. And then there is also the fiscal side to consider (see the previous articles in this bundle for more on this).

From the non-US perspective, there is outsized angst coming from the Trump administration's tariff ambitions and the isolation threat to boot. The eurozone economy is already weak and suffering a degree of political vulnerability e.g. the forced holding patterns ongoing in Germany and France. Meanwhile, Meloni’s right-leaning Italian administration is remarkably looking more like a picture of stability. Fundamentally, eurozone inflation is proving stubbornly sticky, just a tab above where it needs to be. But the European Central Bank will be minded to cut rates by enough to ensure no return to a dis-inflationary spiral that might come from macro malaise. That continues to argue for far more rate cuts from the ECB than from the Federal Reserve, in turn keeping the spreads differential wide.

The wide spreads theme presents opportunity in the classic positive carry play

This presents an opportunity to engage with these spreads. For liability managers, the opportunity is there to receive USD and pay EUR, or say JPY amongst others, for a significant reduction in funding costs. The same trade obtains for asset managers where the outcome is a pick-up in yield from lower yielders into US dollars. The challenge is that EUR and JPY are quite weak relative to long-term history, and any mean reversion in the years ahead would eat into the value of this positive carry trade.

The way to deal with this risk is to set out with a view to taking profit in the coming few months (say as the EUR/USD FX rate heads towards parity), or set the trade in a long enough tenor where the forward FX rate offers a tolerable implied breakeven level. For example, on a 7yr tenor there is FX comfort to 1.2 in EUR or 120 in JPY. Either way, get used to a wider-spread environment as an ongoing theme for 2025.

Source:ING

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Warren Takunda

Economic

Asian stock markets and the dollar took a breather on Wednesday ahead of an anticipated rate cut in Canada and a U.S. inflation reading expected to leave the Fed on course to cut rates again.

Investors were a touch cautious because, with an 85% chance of a U.S. rate cut next week priced in and with Wall Street indexes around record highs, there is room for disappointment.

The S&P 500 had dipped 0.3% on Tuesday though it was just 65 points, or a little short of 1% shy of its all-time high.

U.S. futures rose 0.1% in the Asia session. European futures fell 0.2% and FTSE futures fell 0.4%. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4% and Japan's Nikkei was flat.

The median forecast of economists polled by Reuters is for headline and core U.S. consumer prices increasing 0.3% month on month, for November. No forecasts were above 0.3%, which analysts say leaves markets vulnerable to a surprise.

"The 0.4% case is a barnburner," said trader and president at analytics firm Spectra Markets, Brent Donnelly.

"The trade is to buy USD and sell stocks on 0.4% and do nothing otherwise." The dollar is likely to rise if markets pare back the speed and depth of expected U.S. rate cuts.

Analysts at the Commonwealth Bank of Australia think the dollar index will probably drift lower towards 105.1 if inflation meets expectations, but could shoot up towards 108.1 if core inflation comes in at 0.4% or higher.

The index was last at 106.4.

U.S. yields had ticked marginally higher and benchmark 10-year yields were steady in Asia at 4.240%.

CUTS AHEAD

The Canadian dollar touched a 4-1/2 year low on Tuesday and, at C$1.4165 per dollar, was close by on Wednesday as traders saw an 89% chance of a super-sized 50 basis point rate cut later on Wednesday.

Canada has already reduced rates by 125 basis points (bps) this cycle but news last week that the jobless rate spiked to an eight-year high of 6.8% in November has driven bets on an extra 50 bps of cuts, which would bring the overnight rate to 3.25%.

Broader foreign exchange markets were steady, with the euro at $1.0524 and the yen at 151.73 per dollar.

Markets have fully priced a European Central Bank rate cut on Thursday and a 61% chance of a 50 bps cut from the Swiss National Bank, which would help cool a rally in the franc.

On Tuesday, Australia's central bank left rates on hold, as expected, but dropped a veiled reference to the possibility of a future rate hike and sent the Aussie dollar down sharply.

The Aussie was nursing a 1% drop from the previous session at $0.6372 on Wednesday, while the kiwi had also suffered a kicking and bought $0.5792.

Gold was above its 200-day moving average at $2,688 an ounce. China's resumption of gold buying for reserves seems to have helped spot prices break a recent range.

In other commodity markets, a fillip from China's big policy shift this week seemed to lend support to oil prices, with Brent crude futures up 47 cents to $72.65 a barrel.

Arabica coffee prices hit a record just above $3.48 a pound on Tuesday as dealers worry a drought is going to cut output for top producer Brazil.

Source: Reuters

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Warren Takunda

London stocks fell in early trade on Wednesday, taking their cue from a downbeat session on Wall Street as investors eyed the latest US inflation reading.

At 0850 GMT, the FTSE 100 was down 0.3% at 8,254.31.

The US consumer price index for November is due at 1330 GMT.

Kathleen Brooks, research director at XTB, said: "Today’s US CPI print for November is pivotal for markets. It is expected to show a 0.3% MoM gain for headline inflation, the annual rate is expected to rise to 2.7% from 2.6%, while the annual rate of core inflation is expected to remain at 3.3%.

"We do not think that the outcome of this report will detract from the Federal Reserve cutting interest rates next week, there is currently an 86% chance of a rate cut priced in by the Fed Fund Futures market.

"However, a hot inflation print, that pushes headline inflation well above estimates, could lead to questions being asked about the wisdom of cutting interest rates when inflation remains high, and before the new Trump administration comes in with policies that could trigger even more price pressure down the line."

In equity markets, BA and Iberia owner IAG flew higher as Deutsche Bank upgraded the shares to ‘buy’ from ‘hold’ and hiked the price target to 400p from 215p.

"With fuel set to be tailwind, we see scope for another year of ahead-of-consensus earnings growth in 2025," Deutsche said.

Consumer goods giant Reckitt Benckiser was also a high riser after an upgrade to ‘buy’ from ‘hold’ at HSBC.

British American Tobacco ticked up after confirming it remains on track to meet its 2024 financial guidance, driven by second-half acceleration from investments in US commercial actions, new category innovations, and inventory adjustments.

Kainos surged as it announced that chief executive Russell Sloan was stepping down with immediate effect and that long-standing CEO Brendan Mooney was returning to the role.

Endeavour Mining gained as it said it would conduct a definitive feasibility study on its Assafou-Dibibango gold project in Côte d’Ivoire after preliminary assessment met strategic targets and confirmed its potential to be a tier one asset.

Source: Sharecast

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Warren Takunda

Economic

Gold prices rose for the past two trading days, fuelled by mounting haven demands and China's renewed gold purchases. Expectations for further rate cuts by major central banks have also contributed to the precious metal’s upside momentum. The gold rally extended into the Asian session on Wednesday, with gold futures on the Comex climbing 0.71% to $2,737 (€2,603) per ounce as of 5:12 am CET.

Geopolitical tensions drive haven demand

Over the weekend, Syria's rebel army captured the capital, Damascus, ending Assad's 50-year regime. The political shift, combined with the ongoing Middle East conflicts have heightened global political and economic uncertainties, boosting demand for traditional safe-haven asset gold. A similar surge was also seen in late November amid a major war escalation between Ukraine and Russia.

China's renewed gold purchases and economic stimulus

On Monday, Chinese top officials pledged to adopt "a more proactive fiscal policy", in 2025. Analysts expect the world's second-largest economy to impose more easing policies through rate cuts, raising deficits, and increasing government borrowings.

Additionally, the People's Bank of China said it resumed buying gold reserves in November after a six-month hiatus.

Ray Jia, head of research for China at the World Gold Council, noted in a recent report that gold demand in China is expected to stabilise in 2025, supported by anticipated rate cuts and heightened economic pressure amid Trump's tariff threats.

Central banks poised for further rate cuts

Investors will be closely watching major central banks' rate decisions for the remainder of the week, with widespread expectations of further monetary easing. The Bank of Canada (BoC) is expected to lower its policy rate by 50 basis points later today, while the Swiss National Bank (SNB) and the European Central Bank (ECB) are anticipated to deliver 25 basis point cuts each. Falling interest rates reduce the opportunity cost of holding gold, supporting its appeal as a store of value.

In the US, inflation data for November, due this week, will play a critical role in shaping the Federal Reserve's monetary policy outlook. Markets expect the annual headline Consumer Price Index (CPI) to edge higher to 2.7% from 2.6% in October, reinforcing expectations for another 25 basis point rate cut next week.

Bearish factors for gold

Despite the recent rally, bearish factors remain. Michael Brown, a senior research strategist at Pepperstone wrote in a note on Tuesday, "I’m still in 'wait and see' mode here, particularly when gold's rally on Monday came despite Treasuries selling-off across the curve, as the curve itself bear steepened."

Historically, gold prices move inversely to the US dollar and government bond yields. A strengthening dollar and rising bond yields exert downward pressure on gold prices, while a weaker dollar and declining yields typically support gold.

Following Trump's recent electoral victory, the dollar has strengthened, and US government bond yields have surged, driven by expectations that renewed tariffs will increase inflationary pressures and prompt the Federal Reserve to tighten monetary policy.

This week, the dollar and US 10-year government bond yields have shown renewed strength, posing potential headwinds for gold. A stronger-than-expected US CPI reading could amplify these pressures, leading to a significant near-term pullback in gold prices.

Source: Euronews

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Justin

Economic

Forex

EUR/USD extends its downside around the psychological support of 1.0500 in Wednesday’s European session. The major currency pair weakens due to firm expectations that the European Central Bank (ECB) will reduce its Deposit Facility rate by 25 basis points (bps) to 3% in the policy meeting on Thursday and US Dollar (USD) strength ahead of the United States (US) Consumer Price Index (CPI) data for November.

As for the ECB, a rate cut would be the third straight one in a row and the fourth this year.

A 25-bps interest rate reduction by the ECB is widely anticipated as policymakers are increasingly convinced that inflation is under control and increasing signs that Eurozone business activity is struggling. Meanwhile, a handful of ECB officials see risks of inflation undershooting the central bank’s target due to potential tariff threats by US President-elect Donald Trump and weak domestic demand.

With traders pricing in an ECB rate cut on Thursday, investors will pay close attention to President Christine Lagarde’s comments in the press conference after the policy decision for fresh interest-rate guidance. Lagarde could deliver somewhat dovish remarks due to political instability in Germany and France and the potential adverse impact of Trump’s tariffs on the export sector.

Daily digest market movers: EUR/USD under pressure ahead of US inflation data

EUR/USD is down as the US Dollar extends its winning streak for the fourth trading session ahead of the US inflation report, which will be published at 13:30 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 106.50.

Economists expect annual headline inflation to have accelerated to 2.7% from the October reading of 2.6%. In the same period, the core CPI – which excludes volatile food and energy prices – is expected to have risen steadily by 3.3%. The month-on-month headline and core CPI are estimated to have grown by 0.3%.

The impact of the inflation data shouldn’t significantly tweak market expectations for the Federal Reserve’s (Fed) likely interest rate action in the policy meeting on December 18 unless there is a dramatic deviation from what’s expected. Recent commentaries from a majority of Fed officials have indicated that they are confident about inflation remaining on a sustainable path towards the bank’s target of 2%.

According to the CME FedWatch tool, the probability for the Fed to reduce interest rates by 25 bps to 4.25%-4.50% is almost 90%.

Technical Analysis: EUR/USD struggles to hold 1.0500

EUR/USD struggles near the psychological figure of 1.0500. The outlook of the major currency pair remains bearish as the 20-day EMA near 1.0565 acts as key resistance for the Euro (EUR) bulls.

The 14-day Relative Strength Index (RSI) wobbles near 40.00. Should the RSI fall below this level, a bearish momentum will trigger.

Looking down, the November 22 low of 1.0330 will be a key support. On the flip side, the 50-day EMA near 1.0700 will be the key barrier for the Euro bulls.

Source: FXSTREET

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European Central Bank Heads for Last Rate Cut of Year — but Jumbo Move Seems off the Table

'Heavy lifting'

Source:CNBC

Crude Oil Posts Third Straight Day Of Gains Ahead Of Opec Report

Oil news and market movers: Mulling and reporting

Oil Technical Analysis: Long term outlooks remain key

US WTI Crude Oil: Daily Chart

Source: FXSTREET

Spreads to the US to Widen for Most of 2025

The oomph coming out of the US has manifested in wider spreads across the board

The wide gaps that have opened up between low yielders and the US

Tariff price risks are an additional factor, while the eurozone simultaneously goes through macro malaise

The wide spreads theme presents opportunity in the classic positive carry play

Source:ING

Stocks Settle in for Nervous Wait on US CPI

CUTS AHEAD

Source: Reuters

London Open: Stocks Fall Ahead of US Inflation Reading

Source: Sharecast﻿

Gold Rallies Ahead of Central Bank Rate Decisions and Post-Syria Tensions

Geopolitical tensions drive haven demand

China's renewed gold purchases and economic stimulus

Central banks poised for further rate cuts

Bearish factors for gold

Source: Euronews

Eur/usd Weakens Amid Firm Us Dollar Ahead Of Us Inflation, Ecb Dovish Bets

Daily digest market movers: EUR/USD under pressure ahead of US inflation data

Technical Analysis: EUR/USD struggles to hold 1.0500

Source: FXSTREET

Risk Disclosure

Source: Sharecast