Instimatch - FX morning commentary - 19/12/24

Good morning

Ahead Today     G3:         US 3rd estimate for Q3 GDP, initial jobless claims, leading index, existing home sales;

Multiple central banks convene today including the BoE, Sweden, Norway and Czech Republic. Markets expect unchanged rates from the Bank of England, in line with market pricing, and hence the FX response will likely be muted. In the US the focus is on the jobless claims data where the market is looking for slightly lower initial claims. We will also get the third reading of Q3 GDP data, before attention then turns to the PCE deflator on Friday. The important month-on-month core reading is expected to return to 0.2%.

The Eurozone calendar holds only few pieces of note. We get French business and manufacturing confidence indicators as well as a German consumer confidence reading ahead of the Eurozone consumer confidence on Friday.

The Fed duly reduced interest rates by 25bps to 4.25%-4.50%, as expected. But it was a hawkish cut, supporting US dollar strength and pushing US yields higher. Fed Chair Powell has said that the Fed can be cautious with easing, is still on track to lower rates, but more inflation progress is needed for additional rate cuts. There's also uncertainty regarding Trump’s fiscal and trade policies, which could add to inflation pressures. Meanwhile, Powell has sounded confident that inflation will continue to decline. As for the Fed’s dot plot, a lack of further disinflation progress has led to the median dot showing just 2 rate cuts in 2025, which would bring the benchmark policy rate to 3.75%-4.00% by the end-2025.

The USD index rose 0.1% in Asian trade above 108.00 for the first time since November 2022 at 108.11.

There is limited downside expected in EUR/USD for now but longer term traders maintain their bearish stance given the interest rate differentials between US and Euro area and the prospect of Trump tariffs.  EUR/USD is currently on the defensive below $1.0400 trading around $1.0370 at the European open

EUR/GBP had a muted reaction to the release of UK November inflation data yesterday, with focus turning to the BoE rate decision today. UK inflation surprised slightly to the downside but overshot the BoE's forecast on both headline and services. Headline came in at 2.6% (cons: 2.6%, prior: 2.3%, BoE: 2.4%), core at 3.5% (cons: 3.6%, prior: 3.3%) and services at 5.0% (cons: 5.1%, prior: 5.0%, BoE. 4.9%). The increase in the headline measure was driven by base effects in core goods price inflation, where the large drop from last year drops out of the yearly measure.  Traders expect the next cut now in February, and expect an unchanged decision from the BoE with 8-1 vote split in favour and focus on sticking to a gradual guidance.  GBP/USD edges higher towards $1.2600 after declining more than 1% following the Fed’s hawkish cut.

Traders do not expect any big moves in NOK FX upon the Norges Bank rate announcement today (no change is expected) albeit the balance of risk maybe skewed towards a slightly stronger NOK. 

The Bank of Japan kept its short-term policy rate unchanged at 0.25%, as policymakers remained cautious over Japan’s economic outlook and the path of inflation.  The yen weakened further after the announcement, USD/JPY breached the 155 level to hit an overnight high of 155.36, its highest level since November 21.  Still, the BoJ remains on track for rate normalisation, though the timing of the next rate hike could be in January. In the meantime, BoJ Governor Kazuo Ueda said that the central bank will keep adjusting the degree of easing if the economic and the price outlook is to be realised. 

Asian currencies weakened against the US dollar in Wednesday’s session, driven by sustained US dollar strength and elevated long-term US treasury yields.

Elsewhere, a couple of key central bank meetings took place yesterday. Bank Indonesia held its policy rate at 6.00% to support the rupiah.  The consensus outlook for USD/IDR is for the pair to rise towards 16,250 by Q1 2025 on potential US tariff announcement.

The Bank of Thailand (BoT) also kept its policy rate unchanged at 2.25% yesterday, defying government pressures for further easing. USD/THB is forecast to trade around 34.70 by end-2024 and 36.10 in Q1 2025.