In the Asian session on Thursday, the US dollar index hovered around 108.08, and non-US currencies fluctuated. It is important to remind traders today that they are also paying attention to key US GDP and inflation data to be released later this week, which may further affect expectations for monetary policy. The Bank of Japan's interest rate decision and the Bank of England's interest rate decision will also be released this trading day, and investors also need to pay attention.
US dollar: The US dollar index hovered above the 108 mark. The US dollar index, which measures the value of the US dollar against a basket of currencies, remained around 107.80 on Wednesday after the Federal Reserve was widely expected to cut interest rates by 25 basis points, bringing the benchmark interest rate to a range of 4.25%-4.50%. The Fed's latest forecasts indicate a more cautious but slightly hawkish approach, raising the interest rate forecast for 2025 from 3.4% to 3.9%, with a target of 3.4% for 2026. Despite economic uncertainties, including a weak labor market and persistent inflation, the central bank's gradual policy adjustments indicate a careful balance between controlling price pressures and supporting growth. Technically, 106.52 is the new first support level to prevent profit taking. Next is the key level of 105.53 (April 11 high) which will come into play before entering the 104 area. If the US dollar index falls towards 104.00, the 200-day moving average at 104.19 should curb any declines.
EUR: EUR/USD fell to around 1.0370 during Thursday's Asian trading session. Hawkish rate cuts from the Federal Reserve (Fed) boosted the US dollar (USD) and dragged major currency pairs lower. Later on Thursday, the United States will release weekly initial jobless claims, existing home sales and third quarter (Q3) annualized final GDP. On the other hand, investors expect the European Central Bank (ECB) to cut interest rates at each meeting until June 2025 as policymakers worry about the growing economic risks in the euro zone. Expectations of aggressive rate cuts by the ECB may continue to weaken the common currency. Technical indicators reflect the calm environment. The relative strength index (RSI) remained flat at 42, firmly in negative territory, suggesting limited buying interest. Meanwhile, the moving average convergence divergence (MACD) histogram showed flat green bars, highlighting the pair's lack of decisive momentum.
GBP: The British pound found near-term support earlier in the day, leading GBP/USD to hit an intraday high of 1.2725. The trigger was the United Kingdom (UK) Consumer Price Index (CPI), which rose 2.6% year-on-year in November after increasing 2.3% in October, according to data released by the Office for National Statistics (ONS) on Wednesday. The Fed made minor changes to its policy statement compared to its November meeting. Nonetheless, the dot plot showed that policymakers now expect only two rate cuts in 2025, leading to a hawkish rate cut, boosting demand for the dollar in a risk-averse environment. Technically, the relative strength index (RSI) shows that sellers are in charge, as the RSI targets lower targets in the bearish zone, that is, the first support level for GBP/USD will be the December 17 low level of 1.2665. If cleared, it will clear the way for a test of the December 13 law of 1.2605, followed by the November 22 cycle low of 1.2486. On the other hand, if GBP/USD climbs above 1.2700, buyers must climb above the 1.2814/16 area, the intersection of the 50-day and 200-day moving averages.
On the 18th local time, the EU-Western Balkans summit was held in Brussels. The accession process of the Western Balkan countries has become a major focus of discussion at the meeting. According to the EU, Montenegro and Albania have made some progress in the long accession negotiations recently. Montenegro plans to join the EU by 2028; while Albanian Prime Minister Edi Rama said before the summit that day that he hoped Albania would complete accession negotiations within ten years. Western Balkan countries include Serbia, Croatia, Albania, North Macedonia, Bosnia and Herzegovina, Montenegro and other countries. Among them, Croatia joined the EU in 2013. Although other Western Balkan countries have started the process of joining the EU to varying degrees, the progress is slow.
In the early morning of December 19th, Beijing time, after the two-day interest rate meeting, the Federal Reserve announced a 25 basis point interest rate cut, lowering the target range of the federal funds rate to 4.25%-4.50%. After the Politburo of the Communist Party of China set the tone of monetary policy as "moderately loose", the Central Economic Work Conference held from December 11th to 12th once again emphasized "the need to implement a moderately loose monetary policy" and made more detailed arrangements for this. Wang Qing, chief macro analyst at Orient Securities, predicts that in 2025, the central bank will continue to implement strong interest rate cuts and reserve requirement ratio cuts, of which the policy interest rate cut may reach 0.5 percentage points, which is significantly higher than the 0.3 percentage point interest rate cut this year, and the interest rates of various structural monetary policy tools will also be adjusted down in a timely manner, thereby guiding the financing costs of enterprises and residents downward.
U.S. President-elect Trump and Vice President-elect Vance issued a joint statement on X, saying that "raising the debt ceiling is not a good thing, but we would rather do it during Biden's term." "If Democrats are unwilling to cooperate on the debt ceiling now, who would think they will cooperate during our administration in June? Let's have this debate now," Trump and Vance said in the statement. Trump and Vance also called on Congress to "pass a streamlined spending bill that does not allow U.S. Senate Majority Leader Schumer and Democrats to do whatever they want."
UK service inflation remains at 5%, and the market expects it to remain around this level in the coming months. However, if inflation-linked price increases slow in April next year, core service inflation may fall significantly, which may become an important catalyst for the Bank of England to accelerate the pace of interest rate cuts, faster than the market currently expects.
The latest impact on the eurozone growth story - the German Ifo index fell again - should keep the market's dovish bias in the ECB pricing unchanged, even though there is a consensus that the upcoming German election will bring some degree of fiscal support. Ultimately, a significant narrowing of the Atlantic interest rate spread seems unlikely in the short term. Nevertheless, we are willing to maintain a negative view on the currency pair in the new year, and the beginning of Trump's second term should provide multiple reasons to remain bearish.
Analysts at OCBC Singapore pointed out that although the market consensus currently tends to be that the Bank of Japan will not raise interest rates today, we stick to the view of raising interest rates. Because the recent increase in basic wages supports the view of positive developments in the labor market, while service inflation is still rising, GDP has improved in the third quarter, and wages are expected to grow by 5-6% in 2025. For USD/JPY, it is not just the yen or the Bank of Japan, but also the data from the Federal Reserve and the United States. Although we believe that the overall trend of USD/JPY tends to be downward as the Fed cuts and the Bank of Japan raises interest rates. The risk is that the pace of normalization of their respective policies slows down, especially if the Fed guides a much slower rate cut or the Bank of Japan shows hesitation. Then USD/JPY may face intermittent upside risks.
New Zealand's GDP fell by 1.0% in the third quarter, and the economy fell into a trough. Henry Russell, an economist at ANZ Bank, said that in terms of the next monetary policy meeting at the end of February next year, the money market will now weigh whether the Reserve Bank of New Zealand will cut interest rates by 50 basis points or 75 basis points, rather than 25 basis points or 50 basis points. Given the obvious rebound in high-frequency data, ANZ Bank still tends to believe that the Reserve Bank of New Zealand will cut interest rates by 50 basis points. However, any unexpected dovishness in future data may lead to a 75 basis point rate cut.
The research report said, how to understand the current attitude of the Fed and the subsequent policy rhythm? The rate cut may be suspended in January next year, and the annual rate cut will be about 50BP, but it is likely to be concentrated in the second half of the year. Powell's speech shows that as long as the economy and employment remain stable and inflation remains sticky, suspending rate cuts is a high probability event, and the factors that trigger rate cuts are increased economic and employment risks or rapid downward inflation. We expect that with the resonance of factors such as stable economy and asset prices and upward risks of inflation, the probability of the Fed suspending rate cuts in Q1 or even H1 next year will be higher; if Trump's policies cause economic slowdown and US stocks stop rising and fall, the Fed may cut interest rates again.