Key Points to Watch Out For:
- U.S. and Japanese data take center stage on Christmas Eve
- Gold and stocks reel from the Fed’s hawkish stance—will the dollar extend its rally?
- Potential volatility amid thin holiday trading and Treasury auctions
Inflation Appears to Be Dollar-Friendly
The U.S. dollar has emerged as a dominant force in 2024, a sharp reversal from the dynamics of 2023 when Europe and other global markets struggled with persistent inflation. The Federal Reserve’s efforts to combat inflation have yielded significant progress, setting it apart from other central banks that pivoted to aggressive rate cuts earlier in the year. However, inflationary pressures have not entirely eased, prompting the Fed to hold off on initiating its long-anticipated easing cycle. This divergence in monetary policy has set the stage for continued dollar strength, drawing the focus of traders and investors alike in the lead-up to year-end market activity.
Last week’s Fed meeting wrapped up with a cautious yet hawkish tone. Fed officials projected only two 25 basis point rate cuts for 2025, leading market participants to anticipate fewer reductions from the Fed compared to other central banks, except the Bank of Japan, which continues its path of rate hikes.
While this wasn’t entirely unexpected—especially after Donald Trump’s resounding victory in the U.S. presidential election—it left markets taken aback by the Fed’s persistent caution. During his post-meeting press conference, Fed Chair Jerome Powell highlighted concerns over the inflationary impact of Trump’s policies, including tax cuts and tariffs.
Festive Market Sentiment Dims Amid Rate Concerns
The Federal Reserve’s hawkish stance has cast a shadow over pre-holiday market optimism, as investors grapple with the possibility that anticipated rate cuts may be off the table—or even replaced with hikes—if the Trump administration adheres to its campaign promises.
For now, the dollar remains steadfast, benefiting from a robust U.S. economic outlook. However, the thin trading volumes typical of the holiday season could amplify volatility, particularly in dollar-yen pairs. This week’s calendar is dominated by pivotal U.S. and Japanese data releases, which could shape market sentiment and drive sudden price swings in an otherwise subdued trading environment.
Key U.S. Economic Releases Set a Cautious Tone
Investors are turning their attention to pivotal U.S. economic data scheduled for release on Tuesday, December 24, as November’s durable goods orders and new home sales reports are set to provide fresh insights into the economy. Durable goods orders are projected to decline by 0.4% month-over-month, reversing the modest 0.3% increase seen in October.
Particular attention will likely be given to non-defense capital goods orders excluding aircraft, a key component often viewed as a more stable measure of business investment. This metric plays a significant role in GDP calculations, offering a clearer perspective on the underlying health of the U.S. economy. As markets remain cautious, these figures could shape investor sentiment ahead of the holiday break.
Yen in Focus: Could It Drive Market Moves This Christmas?
In Japan, business proceeds as usual, though limited data releases could still impact markets. Key data following the Bank of Japan’s (BOJ) December policy meeting will be closely scrutinized. Traders are also alert to potential verbal or actual intervention by the BOJ as the yen continues its extended slide.
The BOJ has indicated it will wait until March to consider another rate hike, depending on how wage pressures evolve after spring wage negotiations. However, inflation remains above the BOJ’s 2% target. December Tokyo CPI, due Friday, December 27, could reinforce expectations for a March rate hike. November’s industrial production, retail sales, and unemployment figures will also be released on December 27, offering additional insights.
Canadian Dollar and Pound Require Support
- Canada: On Monday, December 23, the Bank of Canada will release the minutes from its latest meeting alongside October GDP data, which could provide support for the oversold Canadian dollar. The loonie recently hit four-and-a-half-year lows against the U.S. dollar and is poised for a potential correction.
- UK: The pound remains sensitive to political and economic developments, particularly as investors continue to digest the Bank of England’s cautious approach to easing monetary policy.
Conclusion
If volatility strikes during the holiday period, it is likely to impact equity and bond markets the most. Wall Street has reacted poorly to the Fed’s hawkish stance, and bond market pressures could escalate as Treasury yields rise. The U.S. Treasury will auction two-, five-, and seven-year bonds on December 23, 24, and 27, respectively. Low demand could amplify yield pressures.
Gold, which has fallen in the past week alongside rising yields and a stronger dollar, will struggle to regain the $2,600 level as long as the 10-year Treasury yield remains above 4.50%. A retest of the $2,530 support zone is likely, given current dynamics. Investors should brace for potential surprises amid thin trading conditions as the year-end approaches.
