As the year draws to a close

As the week draws into a close markets are slowly entering a sleep mode for the holiday season. We note the low number of financial releases in the week between Christmas and New Year. We also note the possibility of thin trading conditions being present in the markets and could also extend beyond the first days of 2025. Yet the first week of January is expected to be quite interesting with a number of high-impact financial releases from various countries. Making a start with next week, we note the release of UK’s final GDP rate for Q3, Canada’s GDP for October and the US consumer sentiment for December. On Tuesday, Christmas Eve, from Japan, the BoJ is to release the October meeting minutes and from we get the Australia RBAs’ December meeting minutes, while later on we get form the US the November durable goods rate, the new home sales figure for the same month and Richmond’s Fed composite index for December. On Thursday, we get from Turkey, the CBTs’ interest rate decision, Canada’s December Business Barometer and the weekly US initial jobless claims figure. On Friday we get from Japan the December Tokyo CPI rates, the preliminary industrial output for November and BoJ is to release the summary of opinions for the December meeting. In the first week of 2025, we make a start on Monday with Switzerland’s December KOF indicator, on Tuesday we get from China the December NBS manufacturing PMI and on Thursday January 2nd, we note the release of China’s Caixin Manufacturing PMI figure for December, Germany’s final Manufacturing PMI figure for December, and Canada’s manufacturing PMI figure for the same month. On Friday we get the Czech Republic’s revised GDP rate for Q3, Eurozone’s December Construction for December and from the US ISM manufacturing PMI for December.

Fed 25bp feels like a hold

On a fundamental level, President-elect Trump’s newly proposed stopgap bill has failed to pass the House of Representatives and with the deadline quickly approaching, the US Government is facing a potential shutdown as the year comes to an end.

On a monetary policy level, we highlight the release of the Fed’s interest rate decision on Wednesday. The bank cut by 25 basis, as was widely expected yet the release tended to propel the dollar higher against its counterparts. In particular, policymakers are expecting inflation to remain elevated in 2025, with the bank’s summary of economic projections, showcasing that the median participant projects that the appropriate level of the federal funds rate will be 3.9% at the end of next year. Overall, the Fed appears to be concerned about persistent inflationary pressures in the future, and thus appears to be opting for a much more gradual rate cutting approach than previously expected.

On a macroeconomic level, we get the US Core PCE rate for November later on today, as the last inflation metric for the US before the year ends. In particular the expectation by economists is for the rate to accelerate to 2.9% from 2.8% which could be in line with the Fed’s expectations that inflation may be stickier than expected. Such a scenario could act as a secondary shock to the markets, yet should the Core PCE rate come in lower than expected, it could cast some doubt on the Fed’s aforementioned narrative.

Analyst’s Opinion

We have repeatedly expressed our concerns about the Fed’s desire to remain on hold, which now appears to have been validated. Inflation per the Fed may be stickier than expected and adding to that, the incoming administrations economic policies could lead to increased inflationary pressures with the new year. In turn, we are not surprised that the Fed has opted for a more cautious path to cutting rates.

GBP – BoE delays rate cuts by remaining on hold

On a monetary level, we highlight BoE’s interest rate decision which occurred yesterday. The bank kept interest rates steady at 4.75% with a 6-3 split decision. In the bank’s accompanying statement, it appears in our opinion, that the bank remains concerned with inflation potentially remaining sticky in the UK, as “some indicators of inflation expectations had risen, adding to the risk of inflation persistence”.

On a macroeconomic level, it was a busy week for pound traders, with the release of the UK’s employment ,inflation print and manufacturing PMI figures. Starting with the UK’s employment data for October, we note that the releases tended to showcase a resilient UK labour market, which in turn may have provided the bank with some leeway to remain on hold. Yet, the preliminary manufacturing PMI figure for December came in lower than expected, implying a contraction in the country’s manufacturing sector which may be a concern in 2025. However, most importantly the Core CPI rates for November came in lower than expected with Core CPI on a yoy level coming in at 3.5% versus the expected rate of 3.6%, although it should be said that it was still higher than last month’s rate of 3.3% and thus showcases that the bank still has its work cut out for them.

Analyst’s Opinion

The Core CPI rate, may have come in lower than expected, but is still higher than last month’s rate and thus we see the case being made by the BoE in regards to their concerns about sticky inflationary pressures. In our view, we would not be surprised to see the bank opting to see inflation moving in a predominantly downwards trajectory and thus should the sentiment emerging from policymakers be perceived as relatively hawkish, we would not be surprised.

JPY – BoJ remains on hold

The Bank of Japan has decided to keep interest rates steady at 0.25% , in their final meeting for the year. In particular, it appears that the bank is concerned about the potential risks to the Japanese economy stemming from President-elect Trump’s economic policies. Specifically, BOJ Governor Ueda during his press conference yesterday stated that the “decision to keep rates was mainly based on assessment of wage trends, uncertainties of overseas economies and next US administration’s policies”. Essentially, it appears that the bank’s concerns about Trump’s economic policies in addition to their desire to gain “a little bit more info on wage trends” tended to influence the bank’s decision to remain on hold. Nonetheless, we would be interested in the release of the BOJ’s summary of opinions for their December meeting next week on the 27th of December and their last meeting minutes on the 24th of December, which may shed some light on the bank’s internal deliberations as we should note the decision was not unanimous, with one member opting for a 50bp rate hike.

On a macro level, we note the release of the Tokyo CPI rates also on the 27th of December. Should the CPI rates come in higher than the prior rate of 2.6%, and thus imply an acceleration of inflationary pressures in the Japanese economy, it may increase pressure on the BoJ to continue on their monetary normalization path. On the flip side, should the CPI rate come in lower than the prior rate, it may provide the bank with some leeway should they opt to delay hiking interest rates in the future. Moreover, we would like to note the release of Japan’s CPI rates for November earlier on today, which came in hotter than expected and thus could aid the JPY.

Analyst’s opinion

We are now seeing central banks taking into account the incoming US administration’s economic policies, which in itself is fascinating to observe. Yet, we maintain our opinion that the bank will continue normalizing its monetary policy in 2025 and thus, the economic policies from the US could delay but not scrap potential rate hikes by the BOJ in the new year.

EUR – CPI rates showcase easing inflationary pressures in the zone

On a monetary level, we highlight ECB President Lagarde’s comments earlier on this week, in which she claimed that “the darkest days of winter look to be behind us”, essentially implying that the bank is close to declaring victory against inflation. The comments made by the ECB President could be perceived as predominantly dovish in nature, as her comments may imply that the bank may continue cutting interest rates with the new year. In particular, she stated that “ The direction of travel is clear and we expect to lower interest rates further”.

Hence on a macroeconomic level, Germany’s and France’s manufacturing PMI figures continue to delve deeper into contraction territory by coming in lower than expected and lower than their prior figures as well. On another note, the HICP rate on a year-on-year level for November came in lower than expected implying easing inflationary pressures in the zone and thus may provide the ECB with greater confidence to continue cutting interest rates.

Analyst’s opinion

Overall we maintain our view that Germany’s and France’s economies are in trouble. Moreover, we continue to maintain our belief that the ECB may have no other option but to cut interest rates with the new year, which is supported by the comments made by ECB President Lagarde and the HICP rates which were released earlier this week.

AUD – RBA minutes due out next week

On a monetary level we note that RBA’s last meeting minutes are due out on Tuesday the 24th of December. Aussie traders may be looking for further confirmation that “inflation is moving sustainably towards target.” Moreover, market participants may be looking for signs in the bank’s minutes that the bank may be preparing to cut interest rates. In turn this could weigh on the Aussie, whereas should the bank’s minutes fail to showcase a willingness for potential rate cuts in the future, it could aid the AUD.

On a macroeconomic level, it’s been a relatively easy going week for Aussie traders, and that appears to be the case for next week as well. However, given Australia’s close economic ties with China, traders may be interested in the release of China’s NBS manufacturing PMI figure for December on the 31st of December and the Caixin manufacturing PMI figure also for December on the 2nd of January 2025. Should China’s manufacturing PMI figures, exceed the prior figures it may imply a strengthening of the manufacturing sector of China’s economy. In turn, a strengthening of the Chinese manufacturing sector may lead to increase demand for raw materials stemming from Australia and thus could aid the AUD.

Analyst’s opinion

Focus of Aussie traders is expected to be on China in the coming week and with the start of the new year, as a main factor of concern given the close Sino-Australian ties. Overall, we remain concerned about China’s economy heading in 2025 and thus would not be surprised to see a struggling manufacturing sector in China.

CAD – Canada’s easing inflationary pressures

The CAD continued weakening for a third week in a row against the USD.

On a macroeconomic, Canada’s headline CPI rates for November came in lower than expected, at 1.9% versus 2% on a year-on-year level and 0% versus 0.1% on a month-on-month level. The lowerthan-expected headline CPI rates tended to move in tandem with the Core CPI rates for November, essentially showcasing easing inflationary pressures in the Canadian economy. In turn this may provide the BoC with greater confidence, should they wish to continue on their rate-cutting cycle. Of some interest may be Canada’s final GDP rate on a mom level for October which is due out on Monday the 23rd of December.

Furthermore, we would like to note that Canada’s retail sales rate for October have yet to be released and thus could influence the CAD. In particular, the core retail sales rate on a mom level for October is expected to come in at 0.2% which would be lower than the prior month’s rate of 0.9%. Such a scenario could imply that the Canadian consumer may be spending less and thus may further amplify calls for the BoC to continue cutting rates which may weigh on the CAD and vice versa.

Analyst’s opinion

We tend to remain bearish for the CAD in the coming week, given this week’s CPI rates which may provide the bank with greater confidence to continue on their rate cutting cycle.

General Comment

Overall we expect market activity in the coming week to be relatively muted, as we enter the Christmas Holiday season, with minimal financial releases expected. However, the risks for elevated volatility remain, as a few market participants could impact the market, given the lack of activity during the Christmas period. Moreover, we expect volatility to pick up with the new year, with some number of high-impact financial releases in the first week and second week of January and we highlight particularly the US Employment Report for December. In regards to US stock markets, we saw the bears take control on Thursday, yet on a general level the US stock markets moved significantly higher during the year, and with Trump set to take office in January 2025, they may experience newfound support. Lastly, on a geopolitical level, the situation in general in the Middle East appears to be stabilizing as we shift our focus towards Asia.

Happy holidays from the IronFX Research Team.

If you have any general queries or comments relating to this article please send an email directly to our Research team at research_team@ironfx.com

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