Gbp/jpy Appreciates To Near 195.50 After Boj Policy, Focus Shifts To Boe Decision

In focus today

A packed European central bank day kicks off with the Riksbank decision at 9:30 CET. We expect a 25bp cut to 2.50% and that the central bank will maintain a message of more cuts at the beginning of 2025. Following the November decision to cut by 50bp to 2.75%, the communication has been that the September rate path largely holds. We expect the new rate path to signal an endpoint of around 2.10%. 

We expect Norges Bank to keep the policy rate unchanged at 4.5% and to signal that the first cut is most likely to be delivered in March. The decision will be published at 10:00 CET. We expect that the rate path will be marginally adjusted upwards and indicate between three and four rate cuts next year and a policy rate of just over 2.5% towards the end of the forecast period. This is well in line with the current market pricing for next year, but significantly lower for 2026-27. 

For the Bank of England (BoE) decision at 13:00 CET, we expect the Bank Rate to be kept unchanged at 4.75% in line with consensus and market pricing. We pencil in a vote split of 8-1. Note, this meeting will not include updated projections nor a press conference. In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we pencil in a slowdown to only quarterly cuts. This leaves the Bank Rate at 3.25% by end-2025. 

Today’s data calendar is light with the US Philly-Fed business sentiment indicator for December being one of few highlights. In Sweden, the social partners within the industry exchange demands for the 2025 wage negotiation this morning.

Economic and market news

What happened overnight

Bank of Japan (BoJ) chose to keep rates unchanged, which was in line with market pricing and our call. The vote split was 8-1. The economic recovery in Japan looks on track, real wages have at least stopped falling and inflation is close to target. Thus, there is a sound case for hiking rates. The need for yen-support however seemed a bit less acute and the cost of postponing to January had come down. At least that was the case before the hawkish Fed turn yesterday. The yen has had some rough hours, sliding another 1% vs. the USD, first on the FOMC meeting and then the BoJ announcement. If anything, Governor Ueda will probably take a hawkish tone on the press conference to avoid adding further to the yen slide. We expect the BoJ will hike by 25bp in January.

What happened yesterday

The Federal Reserve cut the policy rate target by 25bp to 4.25-4.50% at last night’s meeting, yet Chair Powell struck a very hawkish tone on the outlook. Policy has entered ‘a new phase’, and barring major downside data surprises, the Fed expects a slower pace of rate cuts starting from January. The updated median dots now project only a single 25bp cut every six months for the next 2.5 years, while the longer-term dot was raised by 0.1pp to 3.0%. We have revised up our forecast for the Fed funds rate, and now expect only quarterly 25bp cuts from Mar/25 onwards. We maintain our terminal rate forecast at 3.00-3.25% (reached in Mar/26, prev. Sep/25). See Fed review: In a new phase, 18 December.

In the UK, inflation surprised slightly to the downside in November but overshot the BoE’s forecast. Headline came in at 2.6% y/y (consensus: 2.6%, prior: 2.3%, BoE: 2.4%), core at 3.5% y/y (consensus: 3.6%, prior: 3.3%) and services at 5.0% y/y (consensus: 5.1%, prior: 5.0%, BoE. 4.9%). While service inflation momentum slowed, our own measure of core services, which excludes volatile components, increased slightly after edging lower the past many months. Service inflation is likely to stay around 5% for the next couple of months, arguing for a more gradual approach from the BoE.

In US politics, incoming President Trump warned fellow Republicans of potential ousting if they chose to support House Speaker Johnson’s bipartisan funding bill, which would extend the current funding debate until mid-March. Trump insists that the bill should include an increase in the debt ceiling. If new funding is not agreed upon by Saturday, a partial shutdown of the US government could be the consequence.

Equities: Global equities declined sharply yesterday, driven by the US and the hawkish cut from the Federal Reserve, combined with a notable increase in inflation expectations in the Summary of Economic Projections (SEP). US equity markets got all the attention yesterday, as most indices experienced their worst session since the early August turmoil and ended close to the day’s low following the Fed meeting. With the significant turnaround, some of the past winners were sold off the most, particularly in consumer discretionary and auto & components sectors, with Tesla leading the decline, down 8%. Additionally, inflation fears resurfaced, impacting growth stocks and especially small caps, with the Russell 2000 losing 4.4% yesterday. The VIX increased from 16 to 28, which speaks more about investors’ positioning leading into this rather than the Fed change yesterday. As we approach Christmas, this situation becomes more delicate, as many investors likely remember 2018, when equities plummeted in December, accelerating towards Christmas Eve, only to recover the losses in the following three months. While we are in a different macroeconomic and monetary environment this time, we perceive risks for the markets, as investors are heavily loaded on risk and might be tempted to de-risk ahead of the holiday season. In the US yesterday, Dow -2.6%, S&P 500 -3.0%, Nasdaq -3.6%, and Russell 2000 -4.4%. Asian markets are lower this morning, but the movements are rather limited compared to what happened on Wall Street yesterday. US futures are mixed while European fugures are down by 1-1.5%.

FI: US rates rose significantly following yesterday’s hawkish signals from Powell. The UST curve trades about 13-15bp higher this morning, which will of course have implications for the EUR rates markets today. As market-based inflation expectation measures are (roughly unchanged), yesterday’s strong increase in yields and deep drop in equities has left US financial conditions significantly tighter. If this spills over to the EUR market, it could warrant a softer tone from the ECB at the coming period. The pricing of Fed cuts next year is about 20bp lower with only 35bp priced until end-2025. The EUR curve was roughly unchanged with the action happening after the close.

FX: FOMC decided to cut the Fed funds target range by 25bp to 4.25-4.50%, as expected. It was a hawkish cut as the rate path was lifted by half a percentage point for both 2025 and 2026, thus signalling a slower easing pace from here. The USD took a leap higher as did US yields. EUR/USD dropped well below 1.04 and USD/JPY toward 154.50, where the latter rose another figure to around 155.50 after the Bank of Japan left rates unchanged this morning. The overall reaction in EUR/Scandies was muted, though with a slight move higher. In relation to the Riksbank’s rate decision today, market-moving surprises, if any, could come with guidance including the rate path. We expect unchanged rates from both the Bank of England and Norges Bank, in line with market pricing, and hence we expect the FX response will be muted.

Source: ACTIONFOREX

The AUD/JPY cross drifts higher to around 96.70, snapping the two-day losing streak during the Asian trading hours on Thursday. The Japanese Yen (JPY) weakens after the Bank of Japan (BoJ) policy announcements.

 As widely expected, the BoJ kept the short-term policy rate target steady in the range of 0.15%-0.25% following a two-day policy meeting that ended Thursday. According to the summary of the BoJ policy statement, Japan's economy is recovering modestly, but with certain vulnerabilities. Inflation expectations are increasing modestly. However, uncertainty over Japan's economic and pricing future remains strong.

The Japanese central bank will examine whether the current wage hike momentum in Japan continues into next year, as some smaller firms have struggled to pass on higher costs to consumers. Later on Thursday, investors will closely monitor the BoJ Governor Kazuo Ueda’s speech for fresh impetus. 

On the other hand, the rising bets that the Reserve Bank of Australia (RBA) will cut interest rates sooner than expected might weigh on the Aussie. Gareth Aird, head of Australian economics at CBA, predicted a February RBA rate cut as the central bank had made an “unambiguous shift in the dovish direction.”

Source: FXSTREET

HONG KONG (Dec 19): The Hong Kong Monetary Authority (HKMA) on Thursday cut its base interest rate charged via the overnight discount window by 25 basis points to 4.75%, tracking a move by the US Federal Reserve.

Major Hong Kong banks followed with reductions, but some at a smaller magnitude. HSBC cut its Hong Kong dollar best lending rate by 12.5 basis points to 5.25% and Bank of China (Hong Kong) lowered its Hong Kong dollar prime rate to 5.25% from 5.375%.

"The future path of rates remains highly uncertain going into 2025," HSBC's Hong Kong CEO Luanne Lim said in a statement.

"HSBC has decided to lower its Hong Kong dollar deposit and lending rates following another US rates cut, bringing a cumulative reduction of 62.5 basis points since this September," she added.

Hong Kong's monetary policy moves in lock-step with the US as the city's currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.

The Fed lowered its policy rate by a quarter of a percentage point, a decision Federal Reserve Chair Jerome Powell described as a "closer call," and said a slower pace of projected rate cuts next year reflected higher inflation readings in 2024.

"The pace of (US) interest rate cuts remains uncertain as it is dependent on US inflation and labour market data developments, and economic activity may also be influenced by fiscal, economic and trade policies," HKMA Chief Executive Eddie Yue told reporters.

Yue said Hong Kong interest rates could remain at relatively high levels for some time, and the extent and pace of future interest rate cuts was subject to considerable uncertainty. The public should manage interest rate risk when making property purchases, mortgage or borrowing decisions, he added.

Hong Kong's financial and monetary markets continue to operate in a smooth and orderly manner, while market liquidity conditions remain stable and the Hong Kong dollar exchange rate is steady, HKMA said.

Source: Theedgemarkets