Category: Bonds News

Key Highlights:

• Pound Sterling (GBP) consolidates near 1.2700 against the US Dollar (USD).
• The Federal Reserve (Fed) is expected to cut interest rates by 25 basis points to 4.25%-4.50%.
• UK inflation data supports the expectation that the Bank of England (BoE) will keep rates steady at 4.75%.

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Market Overview

GBP/USD Consolidation Ahead of Fed Policy
The Pound Sterling trades sideways against the US Dollar as markets await the Federal Reserve’s monetary policy decision. A 25-basis-point rate cut is widely anticipated, marking the Fed’s third consecutive reduction.

Investors are keen to assess the FOMC Economic Projections and the dot plot, which will offer insights into the Fed’s future rate path. Recent surveys suggest the Fed may maintain a cautious approach in 2025, with only three rate cuts expected as inflation risks linger.

Impact of UK Inflation Data
In the UK, the November Consumer Price Index (CPI) showed annual headline inflation rising to 2.6% YoY, aligning with expectations. Core CPI rose by 3.5%, slightly below estimates but higher than October’s 3.3%.

This data strengthens expectations that the BoE will keep its policy rate unchanged at 4.75% in Thursday’s meeting, likely with an 8-1 vote split. MPC member Swati Dhingra is expected to favor a 25-bps rate cut.

BoE Governor Andrew Bailey’s press conference will be closely watched for clues on potential policy easing in 2025.

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Technical Analysis

GBP/USD Near Key Moving Averages

• The pair hovers near its 20-day EMA at 1.2815, with immediate resistance at the 200-day EMA around 1.2710.
• On the downside, GBP/USD found support near an upward-sloping trendline around 1.2600, traced from the October 2023 low of 1.2035.

Momentum Indicators

• The 14-day Relative Strength Index (RSI) oscillates between 40.00 and 60.00, signaling a neutral, sideways trend.

Key Levels to Watch:

• Support:
  • 1.2600 (trendline support).
  • 1.2500 (psychological level).
• Resistance:
  • 1.2710 (200-day EMA).

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Conclusion

The Pound remains in a consolidation phase as markets await crucial updates from both the Fed and BoE. While steady UK inflation strengthens the case for unchanged BoE rates, investor focus will shift to Governor Bailey’s guidance on future policy moves. Similarly, the Fed’s dot plot and projections will be pivotal in shaping USD momentum.

In the near term, GBP/USD could see sideways action within the 1.2600-1.2710 range, barring significant surprises from central bank announcements.

The Norwegian Central Bank (Norges Bank) is expected to maintain its current policy stance at its upcoming meeting on Thursday, resisting calls for an earlier rate cut. According to Commerzbank FX analyst Antje Praefcke, the first interest rate reduction is still more likely to happen in March 2025, rather than January.

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Key Insights

1. Balancing Trade-Offs
   • Norges Bank’s primary concern is finding the right balance:
     • Cutting rates too early could prolong inflation above the target.
     • Keeping policy too tight risks unnecessary economic contraction.
   • Policymakers emphasized the importance of assessing more data before deciding, indicating a cautious approach to rate adjustments.
2. Economic Developments and Inflation Trends
   • The disinflation process has slowed.
   • Business activity is expected to improve slightly during the winter and Q1 2025, except in sectors like construction and retail.
   • Wage growth forecasts for 2025 have been revised upwards from 4.3% to 4.5%, and capacity utilization issues remain consistent among firms.
3. Currency Performance
   • The Norwegian krone (NOK) had appreciated since the last interest rate meeting but has since returned to previous levels.

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What to Expect on Thursday

• Rate Path Guidance: Norges Bank is likely to signal that the next rate move will be a cut, but without committing to a January reduction.
• Outlook for March: The positive outlook for employment, wage growth, and recent inflation trends supports delaying the start of the rate-cutting cycle until March 2025.

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Conclusion

Given the economic backdrop and the cautious tone of policymakers, Norges Bank is unlikely to shift from its neutral stance to rate cuts immediately. March 2025 remains the most probable starting point for the easing cycle. Market participants should keep an eye on Thursday’s statement for more clarity on the central bank’s forecasts and future rate path.

The British Pound (GBP) strengthened against the Euro (EUR) following the release of UK labor market data, which points to a more hawkish stance from the Bank of England (BoE), according to ING’s FX analyst Francesco Pesole.

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Key Takeaways

1. Stronger-than-Expected Employment Data
   • UK employment grew by 173k in October on a 3M/3M basis, exceeding expectations of just 5k.
   • While this measure can be volatile and less reliable, it still reflects resilience in the labor market.
2. Wage Growth Accelerates
   • The key focus for the BoE is the sharp acceleration in wages, with both headline weekly earnings and ex-bonus measures rising above 5.0%.
   • Notably, wage growth is concentrated in the private sector, where pay surged at a 12% month-on-month annualized rate, underscoring strong ties to broader economic trends.
3. Mixed Signals in the Jobs Market
   • Despite robust wage growth, signs of cooling persist: job vacancies remain below pre-COVID levels, suggesting some slack in the labor market.

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Implications for EUR/GBP

• The hawkish wage data is likely to strengthen the BoE’s position, amplifying policy divergence with the dovish European Central Bank (ECB).
• Short-term outlook: EUR/GBP is expected to stay below 0.830, with risks leaning further to the downside as the BoE is likely to hold rates steady this week while emphasizing a cautious policy path.

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Conclusion

Today’s data provides BoE hawks with fresh arguments for maintaining a vigilant stance on inflation. This divergence between the BoE and the ECB bolsters the GBP, keeping EUR/GBP under pressure in the near term. Traders should monitor ongoing labor market trends and BoE messaging for further cues.

• USD/JPY extends its rally for a sixth consecutive day, hovering near a three-week high.
• Market skepticism over the Bank of Japan’s (BoJ) willingness to hike rates continues to pressure the Japanese Yen (JPY).
• Elevated US Treasury yields and expectations of a less dovish Federal Reserve (Fed) support the US Dollar’s strength.

Market Dynamics

1. Bank of Japan Policy Outlook
Investors remain unconvinced that the BoJ will tighten monetary policy further at its meeting this week. While Japan’s economy has shown resilience—evidenced by stronger-than-expected Core Machinery Orders (up 2.1% in October, 5.6% YoY) and improved Manufacturing PMI (49.5 in December, up from 49.0)—the data is unlikely to sway the central bank’s cautious stance.

Despite consumer prices exceeding the BoJ’s 2% inflation target and a modestly expanding economy, doubts persist over whether the BoJ will raise interest rates, keeping the JPY on the defensive.

2. US Dollar and Treasury Yields
The US Dollar benefits from elevated Treasury bond yields as markets price in a 93% chance of a 25 basis point rate cut at the Fed’s December meeting. Signs of stalled progress toward the Fed’s 2% inflation target, however, have tempered expectations of aggressive rate cuts in 2025.

Additionally, geopolitical risks and concerns over US President-elect Donald Trump’s tariff policies could lend some support to the safe-haven JPY, though these factors have yet to trigger a sustained recovery.

3. Mixed Japanese Economic Data

• Services PMI rose to 51.4 in December from 50.5, pushing the composite PMI to 50.8, its highest since November.
• Japan’s Tankan survey reported improved business confidence among large manufacturers.
• Despite this, the JPY struggled to gain traction, weighed down by skepticism surrounding the BoJ’s policy trajectory.

Technical Outlook: USD/JPY

• Upside Potential:
  A sustained break above the 154.00 handle and the 61.8% Fibonacci retracement level of the November-December drop could pave the way for further gains. The next key resistances are located at 154.55 and the 155.00 psychological level.
• Downside Risks:
  Support levels are seen at 153.35-153.30, followed by 153.00. A break below 153.00 could expose the 200-day Simple Moving Average (SMA) near 152.10-152.00. Failure to hold this level may shift momentum in favor of bearish traders, targeting 151.00 and ultimately the 150.00 psychological mark.

Outlook

Traders remain cautious ahead of this week’s critical FOMC and BoJ meetings, which are expected to shape the near-term trajectory of USD/JPY. The pair’s performance will hinge on policy signals from both central banks, with the Fed’s tone on rate cuts and the BoJ’s inflation outlook being pivotal factors.

In its monthly report released Friday, the Bundesbank projected a 0.2% contraction in Germany’s Gross Domestic Product (GDP) for 2024, followed by limited growth of 0.2% in 2025 and 0.8% in 2026.

Key Highlights:

• The German economy is expected to stagnate during the winter months, with a slow recovery anticipated throughout 2025.
• Trump-era tariffs could reduce German economic growth by an estimated 1.3% to 1.4% by 2027.
• Structural challenges and economic headwinds continue to weigh on the country’s performance.
• Persistent economic weakness is now having a noticeable impact on the labor market.

Germany faces a challenging road ahead, with ongoing structural issues compounding the effects of economic slowdowns and external trade pressures.

Euro PRICE Today

The table below shows the percentage change of Euro (EUR) against listed major currencies today. Euro was the strongest against the Japanese Yen.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.21%	0.25%	0.52%	-0.01%	-0.08%	0.00%	0.22%
EUR	0.21%		0.46%	0.76%	0.19%	0.13%	0.22%	0.44%
GBP	-0.25%	-0.46%		0.29%	-0.27%	-0.34%	-0.24%	-0.03%
JPY	-0.52%	-0.76%	-0.29%		-0.53%	-0.61%	-0.53%	-0.31%
CAD	0.01%	-0.19%	0.27%	0.53%		-0.08%	0.02%	0.23%
AUD	0.08%	-0.13%	0.34%	0.61%	0.08%		0.09%	0.30%
NZD	-0.01%	-0.22%	0.24%	0.53%	-0.02%	-0.09%		0.21%
CHF	-0.22%	-0.44%	0.03%	0.31%	-0.23%	-0.30%	-0.21%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent EUR (base)/USD (quote).

China’s Vice Chairman of the National People’s Congress (NPC) Financial and Economic Affairs Committee announced on Friday that Beijing has approved a bill to increase local government debt ceilings, aiming to replace existing “hidden” debts.

Key Takeaways:

• China plans to raise the local government debt ceiling by 6 trillion yuan.
• The new debt quota will be used to replace existing debt, helping to address local government debt risks.
• The NPC’s approval will facilitate the overhaul of local government financing vehicles to curb new debt accumulation.
• A significant policy shift, the move will allocate 6 trillion yuan in local government debt quota to resolve “hidden” debts, with 2 trillion yuan dedicated to debt swaps each year.
• China’s “hidden” local government debt stood at 14.3 trillion yuan at the end of 2023.