On Wednesday, due to the Christmas holiday, all-day trading of foreign exchange contracts under CME was suspended. As of now, the US dollar is quoted at 108.17.
Hamas said that Israel's new conditions delayed the time for reaching an agreement; Israeli Prime Minister Netanyahu said that Hamas is violating the agreement reached in the hostage negotiations.
Afghan interim government: Pakistan's air strikes in Afghanistan killed 51 people. An Azerbaijan Airlines passenger plane crashed in Kazakhstan, killing 38 people.
The Japanese government will prepare a record $734 billion budget for fiscal 2025.
Given the hawkish rate cut in December, we believe that the Fed will abandon rate cuts at the January FOMC meeting and wait for more data before confirming the resumption or possible end of this rate cut cycle. Given the Fed's shift to less accommodative policies and continued focus on the dual mission, we believe that the market will pay more attention to economic events in the new year.
In 2024, the 10-year U.S. Treasury yield has a high correlation with the price trend of the U.S. dollar against the yen. Therefore, I think it is necessary to evaluate the trend of the 10-year U.S. Treasury yield when predicting the future trend of the U.S. and Japan. As one of the most liquid contracts in the world, the US 10-year bond futures can be used for this purpose. First, the 10-year Treasury has broken below the lower edge of the rising expanding wedge pattern formed over the past year on the weekly chart and shows signs of further decline. In addition, both the MACD and the 14-period RSI are in bearish territory, indicating that its downtrend is expected to continue, with the possibility of retesting the lows of October 2023. Given that the US Treasury yield is inversely proportional to the US Treasury price, the bearish trend in prices indicates that there is an upside risk to the 10-year Treasury yield, and the rise in the 10-year Treasury yield usually drives the rise of the US dollar.
Returning to the USD/JPY itself, the weekly chart shows that both the price trend and the momentum indicators have been trending upward in late December, suggesting that the market is inclined to buy on dips and is expected to achieve a bullish breakout. From this point alone, I think it is very likely that the US dollar will retest the multi-decade high of 161.95.
But from a fundamental perspective, to drive a sharp rise in the US dollar and the Japanese yen, the market needs to further weaken its expectations of future interest rate cuts by the Federal Reserve. If the expectation of interest rate cuts can be shifted to the expectation of interest rate hikes, it will generate a stronger driving force. However, if the long-discussed US inflation threat does not materialize, it will be difficult to promote this change in expectations, and it will be difficult for the US dollar and the Japanese yen to rise significantly. Moreover, if the US unemployment rate rises sharply in the future, it may trigger a substantial downward trend in the US dollar and the Japanese yen, and this downward momentum will be exacerbated by the increased risk of being forced to unwind carry trades.
Finally, we also need to pay attention to the threat of actual intervention by the Bank of Japan, because in mid-2024, the Japanese government repeatedly asked the Bank of Japan to intervene in the foreign exchange market, not to mention the frequent verbal intervention threats by the Japanese authorities. And the actual situation during this year shows that the level of the US dollar and the Japanese yen is not the key to transforming from verbal threats to actual intervention, but the speed of its exchange rate changes.
It should be noted that actual intervention during the rise in US Treasury yields is unlikely to produce actual results in the short term, and will only provide a better entry position for bulls. The Bank of Japan does not have unlimited foreign exchange reserves to fight market fundamentals, so I think it is more important to pay attention to intervention during the decline in US Treasury yields, which may completely change the price trend of the US and Japan.
From the monthly chart, GBP/USD broke through the downward trend line since the decline in 2007 at the beginning of this year, but the upward momentum has not been further continued and is currently testing the support of the trend line.
Now it seems that the Bank of England is likely to cut interest rates more than the Fed next year, which will lead to further pressure on GBP/USD, and the technical side also looks inclined to the downside. The weekly chart shows that GBP/USD fell back after rising to 1.3425, breaking the 200-cycle SMA and the upward trend line since the rise in September 2022. And recently the exchange rate has further fallen below the 100-period SMA, and the relative strength index (RSI) is below the neutral level. The market seems to be inclined to continue to be bearish on GBPUSD. If the bears can successfully take the support of 1.25, 1.23 near the annual low will become the focus of attention of long and short funds. If it breaks down, the support needs to focus on the low of 1.2 in 2023. On the upside, the bulls need to raise the exchange rate to 1.28 to reverse the current decline. The upper resistance needs to focus on the 200-period SMA and the integer mark of 1.30. If it can further break through 1.34, it is expected to continue to expand the rise.
The strong performance of the US dollar in the fourth quarter of 2024 was impressive. Supported by the expectation that the Federal Reserve may cut interest rates at a slower pace in 2025, the US dollar index rose by 5%, rising to its highest point in nearly two years. Despite this, I still think the dollar index has the potential to strengthen further in 2025.
The U.S. CPI rebounded for two consecutive months in November, and the latest core PCE also performed strongly, still far from the Fed's 2% target. As the U.S. economy performed better than expected, and the labor market cooled but did not collapse, the Fed's confidence in the continued decline of inflation to the 2% target has faded. From the Fed's latest economic forecast, we can see that compared with September, inflation is higher than expected, economic growth is solid, and the job market remains resilient. All of this shows that the U.S. economy will gain a firm foothold as the new and old powers in the U.S. government are transferred. For the Fed, this expectation will make it difficult to continue to ease next year. The interest rate market currently believes that the Fed will only cut interest rates by 35 basis points next year, and the first rate cut will be in July. However, in my opinion, Trump's policy plan will be the decisive factor in the Fed's interest rate decision next year.
If the Fed slows down its rate cuts, the Bank of England may accelerate the pace of rate cuts due to the continued cooling of the labor market, the faster-than-expected decline in inflation, and the overly weak economic growth. The widening interest rate gap between the United States and the United Kingdom may put pressure on the pound and the dollar in 2025, and it may not be able to maintain its recent resilience.