USD Weakness Continues Ahead of Holidays

FX: Broad USD weakness pulled USD/JPY toward 142 and EUR/USD, which has spent this week within 1.09-1.10, toward the upper end of that range. GBP/USD and AUD/USD moved higher while USD/CAD and, in Scandies, especially USD/SEK was under pressure and the latter printed a new year low yesterday. EUR/SEK made a brief visit below 11.10 but ended the US session close to it, while EUR/NOK were relatively stable above 11.30.

Surprise Dovish Twist

The Federal Reserve (Fed) wraps up the year with a resounding finale. The Fed is not bothered to see the US yields fall in preparation for a rate cut. On the contrary, they endorsed the idea of a policy pivot thanks to an encouraging fall in inflation and sounded way more dovish than everybody expected at their announcement yesterday – which clearly exposed that the policy pivot is coming.

Fed Took An Impressive U-turn

At the final meeting of the Fed took an impressive U-turn from its 2023 approach. 2024 will be different chapter for monetary policy. The Fed left its policy rate unchanged at 5.25%-5.50%. A further rate hike isn’t formally ruled out, but the Fed Chair Powell at press conference and the dots clearly signaled that the Fed is trying to find out when it can start scaling back policy tightening.

Fed Overdelivers – Will ECB and BoE Follow?

The most hotly anticipated central bank meeting of the year did not disappoint on Wednesday, with the Fed potentially delivering this year's Santa rally.

British Pound Rises after Fed Meeting, BoE Next

The BoE is widely expected to maintain the cash rate at 5.25% for a third straight time. There is little doubt that the BoE’s aggressive rate-tightening is over, with inflation falling and the UK economy limping along. The key question is whether Bailey will change his stance and signal that rate cuts are on the way, as Fed Chair Powell did at the Fed meeting.

A Hawkish BoE Followed by An Uneventful ECB Announcement

The Bank of England and the European Central Bank both left rates on hold on Thursday but unlike following the announcement of their counterparts in the US, there were no fireworks.

Bank of England Hawks Extend the Pound's Rally

In a commentary on the decision, the Bank of England emphasised that it is not yet certain that inflation will return to normal through strong wage growth in the economy and higher prices for services.

Sunset Market Commentary

No surprise from the ECB today as the central bank kept its deposit rate unchanged at 4%. While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term. New staff projections show downward revisions to inflation forecasts this (5.4% from 5.6%) and next (2.7% from 3.2%) year with the 2025 forecast unchanged (2.1%) and the first estimate for 2026 suggesting a return below the 2% inflation target (1.9%).

Bank of England Review

As expected, the Bank of England (BoE) decided to keep the Bank Rate (key policy rate) unchanged at 5.25%. The vote split mirrored that of the November meeting as 6 members voted for an unchanged decision and 3 members voted for an increase of 25bp in the Bank Rate.

After Recent Sharp Decline in Yields, Market Dynamics Might Gradually Change a Bit

After the recent sharp decline in yields, market dynamics might gradually change a bit. Outright weak data could confirm the downtrend in yield. However, (activity) data in line or better than expected might slow the market push for early rate cuts. On FX markets, the dollar is fighting an uphill battle. A break of EUR/USD above the 1.1017 end November top brings the YTD top of 1.1276 on the radar.