Markets Steady as Focus Shifts to Fed Rate Decision and 2025 Projections

Today, the foreign exchange and stock markets are demonstrating stability, showing little volatility as traders prepare for the upcoming Federal Open Market Committee (FOMC) rate decision and the release of revised economic forecasts. A 25 basis points (bps) rate cut is widely expected, which would lower the target range to 4.25%–4.50%. However, traders are particularly interested in the guidance and tone the Federal Reserve will provide following this decision.

Key points of interest for the markets include whether the Fed will consider pausing further rate cuts in January, the anticipated timetable for rate reductions throughout 2025, and any adjustments to the neutral rate that could indicate the Fed's perspective on the terminal rate in the current economic cycle.

Meanwhile, all eyes will also be on the Bank of Japan (BOJ) and the Bank of England (BoE) tomorrow, both expected to maintain their current rates. Market participants are keen to identify cues from the BOJ regarding potential rate hikes early in 2025, particularly in January, as it continues to address inflation and aim for a normalized monetary policy. The BoE's Monetary Policy Committee (MPC) voting divisions will also attract significant attention. Traders will seek insights from the BoE's statement on recent economic data surprises and the impact of the Autumn Budget on their economic outlook, especially given the persistently high inflation in critical sectors like services.

From a technical perspective, the reaction of the S&P 500 to the FOMC outcomes today will be notable. The recent upward trend has faced resistance after reaching the 61.8% projection level from earlier highs. A potential selloff today might set the stage for a deeper correction towards the 55-day exponential moving average (EMA) before resuming the upward pathway. Conversely, if the index surpasses the established high, it could pave the way for further gains in the early part of the coming year.

Market Updates

In the European markets, the FTSE is currently up 0.21%, DAX has gained 0.14%, and CAC is up 0.26%. The UK 10-year yield is slightly higher at 4.550, while the German yield is at 2.245. Earlier in Asia, the Nikkei dropped by 0.72%, the Hong Kong HSI gained 0.83%, the Shanghai Composite rose 0.62%, and the Singapore Strait Times fell by 0.53%. Japan’s 10-year JGB yield saw a minor decline, settling at 1.067.

Economic Insights from the ECB

Philip Lane, the Chief Economist of the European Central Bank (ECB), highlighted the need for flexibility in monetary policy decisions during a speech today. He emphasized that in a climate filled with uncertainty, the ECB will follow a prudent approach, making decisions on a meeting-by-meeting basis without committing to a fixed rate path.

Lane noted that the pace of monetary easing could be slower than previously expected if the inflation outlook or economic momentum experiences any positive surprises. Conversely, if there are negative surprises, the easing might need to be expedited. The rate trajectory will be determined by the ongoing evaluation of inflation dynamics and the effectiveness of monetary policy.

Inflation Trends in the Eurozone and the UK

For November, the Eurozone's inflation rate was confirmed at 2.2% year-on-year, a rise from October's rate of 2.0%. The Core CPI, which excludes certain volatile items such as food and energy, eased to 2.7% from 2.9%. Services were the primary contributor to the annual inflation rate, while energy prices contributed negatively, reflecting lower demand.

In the UK, the Consumer Price Index (CPI) increased from 2.3% year-on-year to 2.6%, while Core CPI rose to 3.5%, slightly below market expectations. The annual rate of goods inflation also turned positive, while services remained unchanged.

Japan’s Trade Dynamics

Japan's export figures for November showed a year-on-year increase of 3.8%, driven by strong shipments of chip-making equipment and nonferrous metals, marking a second consecutive month of growth. Imports, however, experienced a decline of 3.8%. The trade deficit stood at JPY -117.6B, extending the current streak of deficits to five months. This has brought attention to Japan's trade balances with key partners, highlighting a trade surplus with the US and an expanding deficit with China.

USD/CHF Outlook

The USD/CHF pair remains neutral as it continues to consolidate below the short-term high. Although a deeper fallback is possible, a bullish outlook remains as long as support levels are intact. A break above the recent high could signal further upward movement.

Economic Indicators

Current economic indicators reveal various trends across regions, reflecting a wide array of financial health metrics and economic outlooks. Key events today include announcements from the US regarding building permits, housing starts, and the anticipated interest rate decision from the Fed.

Markets, Fed, Rate, Inflation, Trade