Usd/cad Price Forecast: Moves Away From Multi-year Peak, Slips Below 1.4400 Mark

USD: Hawkish Fed sends USD spiking

The Federal Reserve cut rates by 25bp as expected yesterday, but the broader policy message was more hawkish than expected. The new dot plot projections were heavily revised, now only factoring in 50bp of additional easing in 2025, and one FOMC member voted for a hold. Fed Chair Jerome Powell said that the Fed will be more cautious moving on and that more progress on inflation is needed for further cuts. Remember, the dovish shift by the Fed a few months ago was triggered by concerns about the jobs market. Yesterday, Powell said the risks to the labour market had diminished, effectively removing any sense of urgency when it comes to easing.

The bear flattening in the US curve pushed the dollar to new highs. DXY is trading at 108.0 and as we discussed in our FOMC review, we think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year. Markets are fully expecting a hold in January and 11bp are priced in for March. If indeed the dot plot works as a benchmark for rate expectations for the next three months, the bar for a data surprise to seriously threaten the dollar’s big rate advantage is set higher.

The Bank of Japan also announced policy, delivering a rather cautious hold which has been digested as a dovish surprise by markets. Consensus was indeed for a hold today but probably expecting more openness towards a hike in January. Governor Kazuo Ueda sounded more data-dependent than forward-guidance-orientated, saying additional information on wages and growth is needed.

USD/JPY has surged through 155 on the back of the hawkish Fed and a hesitant BoJ. The direction of travel looks clearly towards the 158/160 area – an area where the BoJ has sold close to $100bn this year in previously successful attempts to stabilise the yen. We presume the incoming US Treasury will not mind this intervention given that Japan will be trying to support its currency. And back in 2019, the US Treasury labelled China a currency manipulator for allowing its currency to weaken.

EUR: Focus on Scandinavian central banks this morning

EUR/USD took another hit after the Fed. As discussed above we expect the shift in language by Powell to favour a longer period of dollar dominance and keep the Atlantic Spread wide. All this reinforces our view that EUR/USD will keep sliding lower in the coming weeks, and we expect to see the 1.02-1.03 levels being tested.

Elsewhere in Europe, we’ll see central bank announcements in Sweden and Norway this morning. We expect a 25bp cut by the Riksbank and a hold by Norges Bank.

As discussed in our Riksbank preview, forward-looking activity indicators are starting to paint a more optimistic picture in Sweden and inflation has come in hotter than expected of late. However, growth was soft in October. While the end of the easing cycle is in sight (we think rates will bottom at 2%), another cut today seems plausible given the Riksbank’s greater focus on growth and still dovish communication. Anyway, that is a consensus view and we don’t expect major deviations from 11.50 in EUR/SEK near term.

In neighbouring Norway, concerns about an excessively weak NOK have somewhat eased, but EUR/NOK close to 11.80 is still unwelcome by Norges Bank. A re-acceleration to 3.0% in core CPI in November should allow NB to keep supporting the currency via an unchanged policy rate for a bit longer. We still think a cut can come in 1Q25, but that may start to be a closer and closer call. EUR/NOK continues to have good downside potential on fundamentals, but the patchy external environment ahead of Trump’s inauguration should keep NOK bulls satisfied with some stability at best.

GBP: A non-event by the BoE

The latest macro indicators have all but reinforced expectations that the Bank of England will keep rates on hold today. The focus will be on any tweaks to forward-looking language and the vote split (which we expect at 8-1 hold-cut). There is no press conference scheduled for this meeting.

Our perception is that the BoE will try to make this announcement a non-event, offering cautious signals for further easing down the road but still highlighting stickiness in services inflation and wages.

Ultimately, we don’t see the pound being hugely impacted today, and the near-term outlook remains positive for the currency – at least until a fresh round of UK data potentially throws the latest hawkish repricing into question. We see EUR/GBP staying capped below 0.8300 in the coming weeks.

CZK: CNB pause in the cutting cycle

The Czech National Bank is very likely to take the first pause in the cutting cycle today and leave rates unchanged at 4.00%. The main reason is likely rising headline inflation, which is expected to exceed 3% in December although core inflation remains close to the central bank's 2% target. The December meeting will only offer an update to the November forecast. Thus, the main focus will be the press conference and the question of the February meeting. Our economists believe the pause will continue through February and only the March meeting is live for another rate cut. However, January inflation is expected to return to below 3% and risks have been pointing down in recent weeks. Therefore, we believe the February meeting is live and so today we will be looking to see how likely that is.

The market has gone too far with hawkish pricing with roughly one rate cut by the May meeting next year in our view. We think interviews have shown a still CNB board in a cutting mode. Therefore, we believe the communication today will focus on the February forecast and the January inflation print. At the same time, the vote split in our view adds dovish risk for today with 7-0 as a baseline but a decent chance of seeing one or two votes for a rate cut as well. Overall, we prefer to be on the dovish side given market pricing in rates and expect weaker FX after the meeting today.

Markets

The Fed lowered policy rates yesterday from 4.5%-4.75% to 4.25-4.5%, a level chair Powell said is still “meaningfully restrictive”. The decision was expected but not unanimous. Cleveland Fed Hammack voted to keep rates steady which given the circumstances had a lot to say for. The economy is doing fine with GDP forecasts left unchanged at a very decent 1.9-2.1% over the policy horizon. PCE inflation was revised higher to 2.5% from 2.1% in 2025 before easing towards the 2% goal by 2027. Core PCE faced a similar upward adjustment.

The FOMC moved from seeing risks to both inflation gauges as broadly balanced in September to skewed to the upside. In the same vein, uncertainty about both was now much higher. Asked why the Fed did cut, Powell noted the labour market is still cooling, be it gradually, while the inflation story was “broadly on track”. The language in the statement on future cuts changed in a hawkish way though with the bold part being the addition: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” Powell said this signals the Fed is at or near a point to slow the pace of further adjustments. He added that after having cut a cumulative 100 bps the Fed is now “significantly closer to neutral”, warranting a cautious stance. In the updated dot plot, the median rate forecast shifted up by 50 bps over the horizon, meaning next year is now showing two 25 bps rate cuts instead of four.

In addition, the policy rate is expected to remain above an upwardly revised neutral rate (to 3%) in 2025-2027. It’s higher for longer all over again. Powell at the very end of the presser, while labeling it as not a likely outcome, did not even want to rule out a rate hike next year. US yields surged between 8.8 (30-yr) and 14.1 (5-yr) bps on the Fed’s hawkish pivot and may have more room to run in the current momentum. US money markets not even fully price in two cuts next year. The dollar closed at the highest level in two years against the euro. EUR/USD finished at 1.0353 compared to the 1.0491 open. Critical support at 1.0335 (November intraday correction low) is at risk. The trade-weighted index topped 108 for the first time since November 2022.

Multiple central banks convene today. We already had Japan (see below). Next up is Sweden, Norway and the Czech Republic. In core markets, attention shifts from the Fed to the Bank of England. The intermediate meeting is without updated forecasts though. The status quo at 4.75% is all but certain. Governor Bailey’s guidance for 2025 is way more interesting. This week’s stronger-than-expected wage growth and stubborn inflation pressures (core, services) leave the central bank little wiggle room. Money markets barely price in two cuts next year. It’s keeping sterling locked near recent highs against the euro around EUR/GBP 0.823. If Bailey is only a fraction as hawkish as Powell yesterday, a test of EUR/GBP 0.8203 is on the cards.

News & Views

The Bank of Japan kept rates steady at 0.25% this morning. The decision was widely expected after the likes of Reuters and Bloomberg cited sources that the central bank was leaning towards the status quo. Tamura dissented and voted for a hike as the economy and prices were moving as expected and inflation risks were increasing. With the economy “likely to keep growing at a pace above its potential growth rate” and inflation expected to be sustainably at target as projected in the October outlook, a third hike is coming nevertheless. Governor Ueda during the presser confirmed this but said they wanted more information on wage hikes first. The lack thereof today was the reason why they held rates. Since these wage negotiations (shunto) only take place in February/March, a January rate hike suddenly is being questioned as well. The yen, which was already pressured by a strong USD, extends losses on Ueda’s comments. USD/JPY shoots higher to 156.3. Verbal interventions are probably incoming.

New Zealand GDP contracted a much bigger than expected 1% Q/Q in the third quarter this year. It followed a downwardly revised 1.1% (from -0.2%) in Q2, meaning the country technically entered a recession. GDP was 1.5% smaller than in 2024Q3. Part of the steep decline was statistically inspired with adjustments to earlier readings having caused a higher comparison base. Details do show a weak performance across the board from household consumption (-0.3% Q/Q), capital formation (-2.9%) and government consumption (-1.9%). Exports (-2.1%) dropped more than imports (-0.4%) did. The kiwi dollar tumbled on the release with the dollar compounding the downleg in NZD/USD. The pair closed at 0.562. Swap rates slipped 5 bps at the front end of the curve.

Source: KBC Bank

EUR/USD jumps to near 1.0400 in Thursday’s European session as US Dollar’s (USD) bulls take a breather after a sharp run-up on Wednesday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near a fresh two-year high above 108.00. The Greenback attracted significant bids after the Federal Reserve (Fed) reduced its key borrowing rates by 25 basis points (bps) to 4.25%-4.50% on Wednesday, as expected, but signaled fewer interest rate cuts for the next year.

In the latest dot plot, the Fed revised its projections for the number of interest rate cuts in 2025 to two from the four forecasted in the September monetary policy meeting. 

In the press conference, Fed Chair Jerome Powell pointed to uncertainty over inflation, easing downside risks to employment and strong growth in the second half of the year as factors that forced officials to turn cautious on interest rate cuts. "I also point out that we're closer to the neutral rate, which is another reason to be cautious about further moves," Powell added.

Meanwhile, the Fed has also revised the forecast for the core Personal Consumption Expenditures Price Index (PCE), the Fed's preferred inflation measure, for 2025 to 2.5%, up from prior estimates of 2.2% in its latest economic projections.

Jerome Powell refrained from commenting on the consequences of the incoming immigration, tariff, and taxation policies by President-elect Donald Trump on the economy. "It is very premature to make any kind of conclusions,” he said. “We don’t know what will be tariffed, from what countries, for how long, in what size," Powell added.

Daily digest market movers: EUR/USD rises as Euro recovers

EUR/USD advances on Thursday as the Euro (EUR) performs strongly against its major peers even though European Central Bank (ECB) officials have guided a continuation of the policy-easing spell in 2025. The ECB has already reduced its Deposit Facility rate by 100 basis points (bps) to 3% and is expected to cut by a similar margin next year.

ECB policymaker and Governor of National Bank of Belgium Pierre Wunsch has also backed four more interest rate cuts, citing concerns over Eurozone economic growth due to protectionist US policies under Trump’s administration. “Four more rate cuts are a meaningful scenario that I feel relatively comfortable with,” Wunsch said.

Pierre Wunsch openly discussed a potential Euro parity with the US Dollar in an attempt to compensate for the 10% tariffs by the US. “If the Euro touches parity against the dollar, we wouldn't lose as much in terms of competitiveness,” Wunsch said and added: “A larger Euro depreciation would cushion the impact of tariffs on growth.”

In Thursday’s session, the shared currency pair will be influenced by the US Initial Jobless Claims data for the week ending December 13 and the second estimate of Q3 Gross Domestic Product (GDP), which will be published at 13:30 GMT.

On Friday, investors will pay close attention to the US PCE inflation data for November. The core PCE Price Index data is estimated to have accelerated to 2.9% from 2.8% in October. On month, the inflation measure is expected to have grown by 0.2%, slower than the prior release of 0.3%.

Technical Analysis: EUR/USD recovers from 1.0340

EUR/USD bounces back after refreshing a more than three-week low at 1.0340 after the Fed meeting. However, the outlook of the major currency pair remains clearly bearish as all short-to-long-term Exponential Moving Averages (EMAs) are declining. 

The 14-day Relative Strength Index (RSI) slides into the bearish range of 20.00-40.00, suggesting that a fresh downside momentum has been triggered.

Looking down, the pair could decline to near the round-level support of 1.0200 after breaking below the two-year low of 1.0330. Conversely, the 20-day EMA near 1.0500 will be the key barrier for the Euro bulls.

Source: FXSTREET

Sometimes, the truth is hard to say—and even harder to hear. The Federal Reserve (Fed) announced another 25bp cut as widely expected and priced in, but hinted that there will be just about two rate cuts throughout next year. The GDP forecasts for this year and the next were revised higher, the unemployment rate lower, and more importantly, the inflation projections were sensibly higher compared to the September projections. The verdict was clear: the Fed must slow down. Powell said that they’re ‘at or near a point at which it will be appropriate to slow the pace of further adjustments’. Fun fact: they have started cutting rates just three months ago – with a jumbo cut. I think I’ve rarely seen a Fed team acting this erratic.

The market reaction was very aggressive, of course. The US 2-year yield spiked past the 4.35%, the 10-year spiked past 4.50%. The S&P500 dropped nearly 3%, Nasdaq 100’s more rate-sensitive, growth stocks tumbled 3.60% and the Dow Jones smashed more than 2.50%, and extended losses to more than 6% since the beginning of December for the 10th straight session – apparently its longest since 1974. Note that the Dow Jones has been diverging negatively from its tech-heavy peers since the beginning of the month – signalling a renewed concentration on tech stocks. But this time, even the rising stars of the tech couldn’t swim against the tide. Broadcom tumbled nearly 7% yesterday, while Nvidia lost 1.14%. Altogether, the Magnificent 7 stocks gave back a hefty 4.40% after the Fed announcement.

The Fed may have spoiled this year’s Santa rally, as its hawkish shift could trigger a deeper correction across US equity markets—which have enjoyed two stellar years largely thanks to Big Tech. Excluding these giants, the S&P 493 delivered solid, albeit far less impressive, performance. Non-tech sectors have been waiting for Fed rate cuts to claim their share of the pie. Unfortunately, the latest equity rally may fade before it extends to these overlooked corners of the market.

In FX and commodities, the US dollar rallied aggressively across the board, the dollar index jumped more than 1% and gold tipped a toe below the $2600 per ounce and below its 100-DMA. Higher US yields increase the opportunity cost of holding the non-interest bearing gold, yet an accelerated selloff and a prolonged weakness in equity markets could drive capital toward the safety of the yellow metal.

The EURUSD tumbled to 1.0344 on the back of a sharp hawkish shift from the Fed, and the bears are now eyeing the parity as their next big target. On the way, the 1.02 – 61.8% Fibonacci retracement on post-pandemic rebound – should provide the last major support to the EURUSD.

In Japan, the Bank of Japan (BoJ) maintained its policy rate unchanged. Only one out of 9 members voted to hike rates today. The others said they needed more time to assess the risks from Trump policies and the wage outlook. As such, the USDJPY rallied above the 155 level, and is supported by the combination of more hawkish Fed and less hawkish BoJ.

The Bank of England (BoE) is the next major central bank to announce its policy verdict later today. The British policymakers are expected maintain rates unchanged at today’s MPC meeting. The BoE had turned relatively bearish earlier this year, before the Autumn Budget announcement. But the higher government spending plans gave cold feet to Mr Bailey, who immediately stepped back from his ‘more aggressive rate cut’ plans. The problem is, the benefits of higher government spending will probably kick in after the pain of higher taxes to finance it.

And the BoE may have to give its support during this period without fuelling inflation – that’s started giving signs of heating up over the past two months. It’s complicated. As per sterling, Cable was hit by a broadly stronger US dollar yesterday. A cautious stance from the BoE may slow down but not reverse the negative trend provided that the UK’s economy – which performed surprisingly well this year – could feel the pinch of higher taxes before it enjoys the benefits of improved growth. The ‘pain before gain’ scenario could keep the sterling bulls on the sidelines.

In energy, the Fed’s hawkish shift dampened an early rebound in oil prices yesterday. The rebound had been supported by lower-than-expected US oil inventories last week, but the barrel of US crude slipped back to $70 per barrel. The Fed’s cautious stance, coupled with a weak demand outlook and ample supply, lent further strength to the bears. We anticipate rangebound trading within the $67–$70 per barrel range.