With the US election complete and Q3 earnings season drawing to a close, eyes are now turning to December and interest rates, with several major central banks set to decide on their latest interest rate moves, including the Bank of England, European Central Bank, Federal Reserve and Bank of Japan. Here’s what to watch:
- Inflation: While it may take longer to play out, the potential tariffs being implemented by incoming US President Donald Trump has raised concerns about inflation remaining elevated or creeping higher once again. Furthermore, the recent budget announcement in the UK has also caused inflation worries.
- Rate decisions: Given those potential inflation concerns, will central banks become more cautious in their outlooks for interest rates?
- The US dollar: The USD made strong gains against most other major currencies in November. Will that trend continue or is a pullback on the cards?
US Dollar (USD)
The Federal Reserve rate decision on December 18 is expected to result in a cut. However, markets are now speculating that the Fed could slow the pace of cuts in 2025 due to the risk of increased inflation from President-elect Donald Trump’s proposed policies. The US dollar had a solid November, and if the markets continue to run with that narrative and the Fed then hints at a slowdown, then that strength could continue. Citi said in a recent note that they believe the US dollar could experience a temporary pullback in December.
Key Levels:
- EURUSD: Higher – 1.0670, Lower – 1.0330
- GBPUSD: Higher – 1.2800, Lower – 1.2525
- USDJPY: Higher – 157.60, Lower – 149.30
Euro (EUR)
For the European Central Bank, “markets are convinced” that the next rate cut by the European Central Bank will be in December and are eyeing over 125bp of cuts by November next year, according to ING. This is in contrast to the more hawkish sentiment in the US and UK, which could result in a weaker euro in December. ING also noted that a 50bp cut in December by the ECB is still on the table, with some central bank members voicing concerns about growth due to potential trade tensions. As we noted in our November forecast, the EURUSD had been in somewhat of a range for a while. However, it broke lower in November, so the question now is whether that decline will continue into the last month of the year.
Key Levels:
- EURUSD: Higher – 1.0670, Lower – 1.0330
- EURGBP: Higher – 0.8525, Lower – 0.8200
British Pound (GBP)
Like other currencies, the GBP pulled back against the USD once again in November. ING said in its recent article that it thinks “markets have turned too hawkish on Bank of England Cuts.”
“The UK budget announcement on 30 October may be playing a role in the hawkish sentiment, but even after the US elections, the rate cut expectations from the BoE were reduced drastically,” wrote ING. If they have, could we see a slight correction in the GBP? When assessing the GBP/USD chart, a turnaround in the current downtrend could see 1.28 come back into play.
Key Levels:
- EURGBP: Higher – 0.8525, Lower – 0.8200
- GBPUSD: Higher – 1.2800, Lower – 1.2525
Japanese Yen (JPY)
The USDJPY plunged in July and August before pulling back from September until mid-November. However, many believe it to still be in an uptrend. Goldman Sachs said back in a May note that the Federal Reserve cuts and BoJ hikes (which were expected at the time) probably wouldn’t provide that much support. As a result, they expected the yen to remain weak for the next 6 to 12 months. The recent move higher in the USDJPY suggests that the previous forecast could be correct. However, over the last couple of days, the yen’s strength has hinted at a potential push lower once again. Bank of America said recently that it maintains a bearish stance on the USDJPY heading into 2025.
Key Levels:
- USDJPY: Higher – 157.60, Lower – 149.30
- EURJPY: Higher – 170.90, Lower – 163.50
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