Key Points to Watch Out For:
- The Federal Reserve is expected to cut rates in December and pause in January
- The Bank of Japan opts to keep rates on hold
- The Bank of England remains cautious as the year ends
- PMI indices, UK and Canadian CPI, and core PCE inflation are other key focal points for investors
Fed to Pause in January
Following last week’s data, which showed U.S. inflation slightly higher than in October, market participants are nearly unanimous in expecting the Federal Reserve to cut interest rates by 25 basis points this week. However, the likelihood of a pause in January has climbed to 80%, reflecting the cautious tone struck by policymakers.
Fed officials have emphasized the need for a slower pace of rate reductions to manage future risks effectively. President-elect Donald Trump’s pledges to impose significant tariffs and deliver corporate tax cuts are anticipated to fuel inflation, which has already demonstrated resilience.
The strength of the U.S. economy reinforces the Fed’s deliberation over rate cuts. The Atlanta Fed’s GDP model estimates robust Q4 growth of 3.3% QoQ SAAR, and the most recent jobs report confirms that the labor market remains solid. October’s disappointing numbers now appear to have been an anomaly caused by strikes and adverse weather conditions.
Investors will focus on signals regarding the likelihood of a January pause and the number of rate cuts anticipated in 2025. Removing this week’s cut from the equation, Fed funds futures suggest an additional 50 basis points in cuts next year. Depending on the tone of the Fed’s guidance, the U.S. dollar could face downside risks, while equity markets may continue their rally.
Bank of Japan: To Hike or Not to Hike?
The Bank of Japan (BoJ) will meet on Wednesday, December 18, and Thursday, December 19. Market expectations for a 15-basis-point hike have declined to 25% after Board Member Nakamura emphasized that decisions should be data-driven.
Governor Kazuo Ueda and his colleagues remain open to future hikes, citing a strong economy, rising wages, and above-target inflation. However, recent data points to a slowing momentum, making a hike less likely at this meeting.
The yen could see strong support if the BoJ surprises markets with a hike. Even in the absence of immediate action, clear guidance favoring future tightening could provide modest yen appreciation.
Bank of England to Remain Cautious
The Bank of England (BoE) will convene on Thursday, December 19. Unlike the Fed, there is minimal expectation of action, with just a 10% probability of a rate cut. Policymakers are unlikely to make changes before March 2025.
Last month, the BoE cut the Bank Rate from 5.0% to 4.75% but revised inflation forecasts upward due to significant government spending outlined in Finance Minister Rachel Reeves’ budget.
Governor Andrew Bailey’s remarks that “there is still a long way to go” have solidified market expectations for limited easing in 2025, with about 75 basis points of cuts anticipated by year-end.
The BoE’s relatively hawkish stance has bolstered the pound, making it one of the few major currencies to resist the U.S. dollar’s strength in 2024. If the Fed disappoints market expectations, the pound could see additional gains against the dollar.
Other Key Events This Week
Eurozone Challenges:
Preliminary PMI data from France and Germany, due Monday, December 16, could pressure the euro if they highlight further economic difficulties. Both nations face political uncertainty, compounding their economic challenges.
UK Data Ahead of BoE Decision:
Sterling traders will have several opportunities to recalibrate their expectations with October employment and November CPI data scheduled for release on Tuesday, December 17, and Wednesday, December 18. UK retail sales data will follow on Friday, December 20.
Canadian Inflation in Focus:
The Bank of Canada’s recent 50-basis-point rate cut has shifted attention to Wednesday’s Canadian CPI data. Signs of inflation stabilization could strengthen expectations for a pause at the January meeting, offering support for the Canadian dollar.
U.S. Core PCE Data:
On Friday, December 20, the core PCE index for October, the Fed’s preferred inflation measure, will be released alongside personal income and spending data. These reports will provide additional context for inflationary pressures in the U.S.
Conclusion
This week offers a packed schedule of events that could shape currency and equity markets as 2024 winds down. The decisions by the Fed, BoJ, and BoE, combined with key data releases, will offer valuable insights into the global economic outlook and set the tone for market sentiment heading into 2025. With central banks’ policies and economic data under the spotlight, investors must stay attuned to unfolding developments that may bring market volatility and trading opportunities.
