Fed Cut Coming Up – Action Forex

In focus today

Focus today will be on tonight’s FOMC meeting. We expect a 25bp cut, which is also fully discounted by markets. Apart from the rate decision, market attention will be on the updated rate projections, and especially on the FOMC’s latest view on the terminal rate level. We think Chair Powell will aim for a neutral tone in his remarks, but he is still likely to verbally open the door for slowing the pace of cuts. See Fed preview: Gauging for neutral, 13 December for more details.

The UK November inflation out at 8:00 CET will be the data release to watch. Focus is on service inflation, which is expected to continue to show signs of stickiness around the 5% mark. Combined with the hawkish data surprises this week, this will support our call for a BoE pause tomorrow.

Today’s calendar also features the final euro area inflation figures for November, which will provide details on the drivers behind the drop in the services component. Additionally, ECB’s Lane and Muller are on the wire before noon.

Economic and market news

In the US, retail sales figures landed close to expectations at 0.4% y/y in November when measured by the control group (which strips out the most volatile components). Car sales and online sales contributed positively, while other more discretionary categories (furniture, electronics, restaurants) saw weaker or negative sales growth. This could be a signal of a tad more cautious consumer, but of course the monthly data is volatile as always.

In Germany, the IFO indicator for December declined more than expected from 85.7 to 84.7, which can mainly be attributed to lower expectations for the economy. The assessment of the current situation picked up slightly, which was in line with what the comparable PMI survey signalled earlier this week. Overall, soft indicators for the German economy continue to indicate that activity contracted in Q4.

In France, several major banks were downgraded by Moody’s yesterday, following last week’s sovereign rating cut due to the government collapse and the rejection of the 2025 budget. The 10-year French-German government yield spread is currently trading at 80bp, but we see a high likelihood that the spread will go to 100bp early next year.

In the UK, wage growth (excluding bonuses) picked up more than expected from 5.0% to 5.2% y/y in the three months to October. Moreover, payrolls decreased by 35,000 in November, vacancies declined, and the unemployment rate held steady at 4.3% in October. Combined with the stronger than expected PMIs, this week’s UK data releases have so far highlighted why the BoE is set to continue lagging European peers in the easing cycle.

Equities: Global equities were lower yesterday, with a somewhat unusual sector rotation in which consumer discretionary outperformed alongside healthcare. However, the more interesting aspect is the very narrow leadership we have observed recently. To provide a few more examples: the Dow is now down for nine consecutive days, which has not happened in 45 years. At the same time the Nasdaq achieved a record high closing yesterday. Additionally, Tesla has risen in nine of the last ten sessions, significantly contributing to the superior performance of the consumer discretionary sector. The point here is that we have not had any macroeconomic, microeconomic, or monetary policy news that can explain or justify this rotation. However, there is a unique political and CEO situation in the US, coupled with an exuberant market where investors are hunting for winners. In the US yesterday, the Dow declined by 0.6%, the S&P 500 by 0.4%, the Nasdaq by 0.3%, and the Russell 2000 by 1.2%. Asian markets are mixed this morning. European futures are marginally lower, while US futures, including the Dow, are marginally higher.

FI: It was a quiet Tuesday in European rates markets with most of the action in the UK market. The higher-than-expected UK wage figures pushed 10Y GILT yields up by 8bp, while the implied change in the BoE bank rate until end-2025 moved up from -70bp to -55bp. Our forecast is -150bp, leaving substantial downside risk to UK rates for the coming 12 months. EGB yields were close to unchanged across tenors yesterday in line with the UST curve. The 5y5y EUR inflation swap rate moved back to 2%, dropping 3bp throughout the session.

FX: EUR/USD continues to trade close to 1.05 and USD/JPY within 153-154 ahead of tonight’s Fed. Sterling has firmed and cable is back at 1.27, while the antipodeans continue to slide vs the USD. Cable is back at 1.27. USD/CAD has breached 1.43 and takes out new multi-year highs. EUR/SEK has erased some of yesterday’s losses amid poor risk appetite and trades at 11.50, while EUR/NOK has sidelined around 11.75.

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