ECB to kick off hectic period of central bank announcements
G10 currencies all traded in a holding pattern last week, as investors await the December meetings of the key central banks, including the ECB this week and the Federal Reserve and the BoE the next one.
A moderately strong US labour report was not enough to shake markets out of their complacency. The torpor also extended to major emerging market currencies, save for the South Korean won, which ended the week at the bottom of the table, weighed down by domestic political turmoil.
As the year runs out, markets will turn their attention from politics back to central bank policy, at least temporarily. The world’s major central banks will meet between now and year-end, starting with the ECB on Thursday. Markets are pricing in a 25 bp cut with a small chance of something bigger, and we can’t disagree. Another data point will be the last inflation print in the US before the Fed’s December meeting on Wednesday. It would take a massive upward surprise to derail the expect 25 bp
cut the following week.
GBP: Last week was unusually quiet for sterling, with no major macroeconomic news out. Governor of the Bank of England Andrew Bailey delivered some mixed
messages for markets. He indicated that cuts on a quarterly basis were likely on the way next year – this is slightly more aggressive than the three currently priced
in by swap markets. However, he also warned that the impact of the recent budget. which is seen leading to higher UK inflation, could lead to a more gradual
pace of cuts.
The latest survey data has been soft, but hard data has been holding up better Markets see no change in rates from the BoE next week, but are pricing in over
an 80% chance of a cut in rates at the following meeting in February, with a terminal rate of around 4% being is one of the highests among the G10 countries.
Decent economic numbers and relatively high interest rates should continue to support the pound throughout 2025.
EUR: The collapse of the French government was largely priced in by markets, and the common currency actually ended the week posting a modest rebound against
the dollar. Difficulties lie ahead, however, as the government has shown a complete inability to pass a budget for 2025, meaning that the onus on providing
stimulus to the economy will lie squarely on the doorstep of the European Central Bank.
This week’s ECB meeting is key, of course, though institutional pushback against a 50 bp cut has led markets to almost rule out that outcome. Staff forecasts for
growth and inflation will be key, in our view. Current levels of the euro are very low, and we would need to see some meaningful downward revision of those forecasts, particularly inflation, to justify any further downside from here.
USD: The November payrolls report signalled a return to normality after the disruption caused by the hurricanes and the Boeing strike in the previous report. The US
economy remains at full employment, and wages are growing healthily. The dollar initially sold off following the release of the data, perhaps on confirmation
of the higher jobless rate print, although it quickly reversed course as markets reacted to the better than expected job creation and earnings numbers.
The Federal Reserve will probably cut rates next week, but it remains to be seen how much further rates can drop given the macroeconomic context and the
prospect for further inflationary policies from the Trump administration. In fact, the monthly core rate of inflation for November will likely print again near a 4%
annualised rate in the monthly core rate, which we think is hard to square with a terminal rate much below 4%.
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