Outlook for the Week of December 09 – 13

Key Points to Watch Out For:

• Upcoming policy decisions in 2024 will determine the state of market sentiment.
• RBA, BoC, SNB, and ECB decisions are scheduled for this week.
• US CPI will remain crucial, and the Fed is still undecided.

Reserve Bank of Australia to Hold Rates, but Will It Be Less Restrictive?

The Reserve Bank of Australia (RBA) is set to announce its decision on Tuesday, December 10. Unlike its major counterparts, the RBA has not yet initiated a rate-cutting cycle, as policymakers remain cautious about inflation despite its recent decline. In recent comments, Governor Michelle Bullock stated that core inflation remains “too high” and is expected to return to target only on a sustained basis through 2026. Unless there are significant changes to economic estimates, the RBA is unlikely to depart from its “higher for longer” stance in the near term. Investors do not expect a rate cut until April 2025.

The weak Australian GDP data, showing slower-than-expected growth for the third quarter, has raised questions about the level of excess demand in the economy. Monthly CPI was also weaker than expected in October, and further downside surprises could accelerate the timing of the first rate cut. This could prompt Bullock and other board members to become more optimistic about inflation, keeping rates at 4.35%. A bearish bias could also push the Australian dollar below the four-month lows seen after the GDP release.

Australian traders will also be looking for clues from the November employment report, due Thursday, December 12.

Will the BoC Cut 50 Basis Points Again?

In contrast to the RBA, the Bank of Canada (BoC) has been more proactive in cutting rates, having reduced them at least four times in 2024, with the most recent cut being 50 basis points. However, investors are divided on whether the BoC will enact another double cut in December.

Both core and headline inflation rose in October, and the labor market has shown signs of recovery. However, growth remains subdued, and businesses are pessimistic about future prospects, particularly after US President-elect Donald Trump threatened to impose 25% tariffs on all imports from Canada. The widening yield differential between the US and Canada also complicates the BoC’s decision. With the Canadian dollar already down nearly 6% in 2024, policymakers may be reluctant to cut rates further, fearing additional weakness in the currency.

As a result, the BoC’s decision on Wednesday, December 11, whether to cut by 25 or 50 basis points, will be closely watched, with symmetrical risks for the Canadian dollar.

Dollar Awaits CPI Data Ahead of Impending Fed Meeting

The December Federal Reserve policy decision is shaping up to be a dilemma. Judging by the latest rhetoric, most Fed officials favor a 25 basis point reduction at the December 17-18 meeting, although they have not fully committed.

The November CPI report, due on Wednesday, December 11, will be the last major data point ahead of the meeting, making a market reaction almost guaranteed. Headline CPI is expected to increase from 2.6% to 2.7% year-on-year, while core CPI is forecast to remain unchanged at 3.3%. Barring any significant upside surprises, the Fed will likely lean toward lowering rates and might even consider pausing at the January meeting.

On Thursday, December 12, the Producer Price Index (PPI) for November will be released, though it is unlikely to affect the USD much given that it follows the CPI report.

The U.S. dollar is consolidating after hitting two-year highs in November. Any acceleration in month-on-month CPI could reignite bullish sentiment and drive the dollar index to new highs.

Swiss National Bank Poised for Its First Cut Under a New Dovish President

The Swiss National Bank (SNB) has already cut rates three times since March, becoming the first major central bank to ease monetary policy. A further rate cut is expected in December, marking the first decision under the new president, Martin Schlegel, who replaced Thomas Jordan in October.

The size of the cut remains uncertain, with the choice between 25 or 50 basis points being a close call until October’s CPI data showed Switzerland’s annual CPI rising by just 0.7%, below the 0.8% estimate. The probability of a 50 basis point cut has now risen to over 60%. Schlegel’s recent statements have fueled expectations of further reductions, especially after he hinted at the potential reintroduction of negative interest rates.

If the SNB opts for a 50 basis point cut on Thursday, December 12, the Swiss franc could resume its slide against the USD. However, if the SNB sticks to a 25 basis point cut, the franc may extend its recent rally.

ECB Unlikely to Bet Big in December

Following the SNB’s decision, the European Central Bank (ECB) will make its own interest rate announcement. Economists expect a 25 basis point cut, though some investors are betting on a 50 basis point cut, even as the probability for this has dropped to 15% in recent days.

This has helped the euro stabilize somewhat against the USD, as ECB President Lagarde and other policymakers have been cautious about committing to a specific rate path amid rising inflation in the Eurozone. Nonetheless, the weak economy and ongoing political uncertainty in France and Germany have led some traders to speculate that the ECB may need to be more aggressive with its easing policy in the near future.

Despite these concerns, it remains unlikely that the ECB will make significant policy changes in the short term. If the ECB announces a 25 basis point cut on Thursday, December 12, the euro is unlikely to move significantly unless Lagarde delivers a more dovish-than-expected speech at her post-meeting press conference, which could trigger a further decline in the euro.

Pound Rallies in Anticipation of UK Data

Across the English Channel, uncertainty surrounding the UK economic outlook has increased, largely due to the Labour government’s budget. The tax-and-spend budget is expected to boost inflation, making it less likely that the Bank of England will cut interest rates. While the budget includes measures that could stimulate growth, the UK economy appears to have stalled in the short term.

As a result, October’s GDP figures, due for release on Friday, December 13, will be closely watched for signs of growth emerging from stagnation. Sterling has recovered much of its recent losses against the USD, and a better-than-expected GDP report could help to extend those gains.

Conclusion

Elsewhere in the world, the Japanese yen could face volatility with revisions to Q3 GDP data due on Monday, December 9, as well as any surprises from the Tankan quarterly business survey, which will be released on Friday, December 13. Amid uncertainty about whether the Bank of Japan will raise interest rates in its December meeting, the yen remains vulnerable to any unexpected economic data or central bank announcements.