In the Asian session on Wednesday, the US dollar index hovered around 106.91. The Federal Reserve's interest rate meeting started on Tuesday. This is the last policy meeting of the Federal Reserve this year. Analysts believe that the Federal Reserve may release a more gradual rate cut signal. The survey shows that US Treasury yields are expected to rise for the second consecutive month.
US dollar: As of press time, the US dollar index hovered around 106.91. The US dollar index (DXY), which measures the value of the US dollar against a basket of currencies, traded around 106.80 on Tuesday as the upward momentum stagnated after the release of November retail sales. The market focus is still on the Federal Reserve (Fed) interest rate decision on Wednesday, and the 25 basis point rate cut has been digested by the market. Technically, the US dollar index rebounded significantly last week, but the index lacks the strength to retest the 107.00-108.00 range. On Monday, the index fell back. Although it traded around 106.30 on Tuesday, the overall outlook remains constructive if it can stay above the 20-day simple moving average (SMA). Continued growth and upbeat US data are likely to support the dollar, but caution is warranted until a decisive breakout of short-term resistance is seen.
EUR: At press time, EUR/USD was hovering around 1.0498, as Eurozone bullish momentum ran out on Tuesday, pushing EUR/USD back below the 1.0500 mark as thin trading forced FX traders to skim through a glut of US data. Eurozone markets largely ignored the ECB speeches early this week, even as Europe’s December PMI data beat expectations. Eurozone services PMI survey data remained in contraction mode amid concerns about a deepening slowdown in Europe, which continued to unsettle investors and businesses. Technically, the daily EUR/USD chart shows that the pair has been consolidating above the 1.0450 level for a while following a sharp decline from late October highs around 1.1000. The recent stabilization matches investor expectations around the Federal Reserve’s expected 25 basis point rate cut on Wednesday, injecting a degree of uncertainty into the dollar’s trajectory. EUR/USD remains blocked by the 50-day EMA at 1.0658, while the 200-day EMA at 1.0809 maintains a downward bias, adding to the long-term bearish bias. If EUR/USD falls below the key support level of 1.0450, bears may retest the psychological price of 1.0400.
GBP: As of press time, GBP/USD is hovering around 1.2712. GBP/USD rose for two consecutive days on Tuesday to recapture the 1.2700 mark, but only just. GBP/USD is narrowing last week's losses to return to a range as sterling traders prepare for an important year-end schedule, including interest rate decisions from the Federal Reserve (Fed) and the Bank of England (BoE), as well as UK consumer price index inflation. The Bank of England will make its last interest rate decision for 2024 on Thursday based on the consumer price index released on Wednesday. The Bank of England is widely expected to keep its key benchmark interest rate unchanged by an eight-to-one vote. Technically, the daily chart shows that GBP/USD is generally on the defensive, approaching the 1.2700 mark as the candlestick chart shows that traders are struggling to deal with the depressed area around the low 200-day exponential moving average (EMA) of 1.2820.
As households bought more motor vehicles and online goods, US retail sales increased more than expected in November, in line with the strong underlying momentum of the economy at the end of the year. The report released by the US Department of Commerce on Tuesday did not affect expectations that the Federal Reserve will cut interest rates on Wednesday, which will be the third rate cut since the Fed launched its easing policy cycle in September.
Federal Reserve officials began a two-day policy meeting on Tuesday. Signs of strong domestic demand, coupled with the rebound in inflation in recent months, suggest that the Federal Reserve may pause its rate cuts in January. According to CME's FedWatch tool, there is a 95% chance of a 25 basis point rate cut this week, but the chance of a rate cut in January is only about 16%.
The Barclays research team published a research report on the Fed's policy, predicting that the Federal Open Market Committee (FOMC) will cut interest rates by 25 basis points, and the target range of the federal funds rate is expected to drop to between 4.25 and 4.5%, which is the last rate cut before the suspension of rate cuts, and will bring interest rates closer to the neutral level considered by policymakers. It is believed that the FOMC will then release a more gradual rate cut signal.
Barclays believes that the Summary of Economic Forecasts will raise economic growth and inflation forecasts, lower unemployment forecasts, and expect three rate cuts next year. The research team maintains the baseline forecast that the FOMC will cut interest rates no more than twice next year, in March and June, each time by 25 basis points, and expects that in the second half of next year, the core personal consumption expenditure (PCE) inflation level will rise again due to increased import tariffs and stricter immigration control measures.
In addition, Barclays expects the FOMC to continue to cut interest rates around mid-2026, and it is expected that there will be two rate cuts of 25 basis points each time, adjusting the target interest rate range to a moderately tight 3.25 to 3.5%, based on the assumption that the long-term neutral policy rate is about 3 to 3.25%.
A Reuters survey showed that bond strategists' forecasts for U.S. Treasury yields rose for the second consecutive month, with the Fed's remaining room for rate cuts limited and expectations of rising inflation risks in 2025. The Fed kicked off the easing cycle with a sharp 50 basis point rate cut in September, has cut the federal funds rate by 75 basis points, and is expected to cut it by another 25 basis points to 4.25%-4.50% on Wednesday this week.
However, since the first rate cut, the 10-year U.S. Treasury yield, an indicator that moves inversely with price action, has surged about 70 basis points, hitting a nearly six-month high of 4.50% last month. The resilience of the world's largest economy and President-elect Trump's policies, from tariffs to tax cuts, are expected to trigger inflation, which will curb the Fed's easing plans and push up yields, especially those of longer-term bonds.
ClearBridge Investments strategist Jeff Schulze said that the Fed is most likely to cut interest rates by 25 basis points twice next year because the strong economy has caused the estimated number of rate cuts to be biased downward. As for whether it is biased towards one or three rate cuts, Schulze believes that one is more likely.
Robert Both, a strategist at TD Securities, said that the strong momentum of Canada's core inflation will give the Bank of Canada pause in its next considerations. Given the weak labor market, the rebound in core CPI was not enough to prevent the Bank of Canada from cutting interest rates by 25 basis points in January. In addition, trade policy and whether US President-elect Trump will impose a 25% tariff on Canadian imports may put more pressure on policymakers at the Bank of Canada.
The latest survey of global fund managers by Bank of America shows that investors believe that the euro will be the most undervalued currency in the coming year. About 12% of investors believe that the euro is undervalued, compared with 8% in November. Given the weak economic outlook and the outlook for tariff policy from US President-elect Trump, the market expects the European Central Bank to cut interest rates more actively than other central banks, and the euro will be under pressure.