Forex Signals Brief December 14: Will SNB, BOE and ECB Follow the FED with Rate Cuts?

Yesterday started slow, with most forex pair trading in a tight range as markets were awaiting the FOMC meeting, although in the European session, we had the UK GDP report for October, which showed a 0.3% contraction. Other components such as industrial production, manufacturing and construction output also came below expectations, which kept the GFBP soft.

In the US session, the producer inflation PPI also came on the soft side, but there was not much price action until the FED released the statement in the evening, which alluded to more cuts that might be required, emphasizing that the FED is at its top, as Jerome Powell later affirmed in the press conference.

The Dot Plot showed rates at 4.60% by the end-2024, rather than the projected 4.90%, and down from 5.10% previous to the FOMC meeting. Powell accelerated the USD decline later by offering no opposition to the market easing narrative, which is now pricing in more than 140 bps in cuts next year. Furthermore, officials are intent on “not making that mistake” of holding onto high rates for too long.

Today we have three major central banks holding meetings, although it starts with the employment numbers from Australia. With 10K net jobs added, the unemployment rate is predicted to tick up to 3.8% in November from 3.7% previously. The most recent labor market report revealed a 55K jump in jobs, which was significantly greater than predicted, despite the fact that the majority of it was part-time work. As the market anticipates rate cuts in 2024, it is more likely to react to weakness rather than strength.

The SNB kicks off the second day of the central bank bonanza and it is anticipated to hold interest rates constant at 1.75%, up from 1.75% previously, with the usual proviso that “further tightening may become necessary.” Switzerland’s inflation rate has been under the central bank’s 0-2% target for many months on both the headline and core measures, therefore rate reduction should be considered in 2024.

The BoE comes next and it will maintain the bank rate unchanged at 5.25%, but there should be a larger consensus within the MPC for no change this time, which should be bearish for the GBP. MPC members Greene, Mann, and Haskel previously voted in favor of a rate increase. The central bank will reiterate its commitment to keeping interest rates high for as long as necessary to ensure that inflation returns to the 2% target. The market anticipates three rate decreases in 2024, with the first coming in June.

The ECB is anticipated to maintain the deposit rate at 4.00% vs. 4.00% previously. The central bank is anticipated to reiterate that interest rates will remain high for as long as required to return to their 2% target. Rate cuts for 2024 have lately increased as a result of the large miss in the Eurozone CPI report and comments from ECB member Schnabel, who conceded that additional rate hikes are improbable in light of the new inflation statistics. The market now expects 150 basis points of rate cuts in 2024, with the first one occurring as early as March.

US Retail Sales are projected to show a -0.1% decline in November, the same as in October. Retail sales have remained solid for the majority of the year, however, they are showing weakness. The Control Group, on the other hand, came in at 0.2%, as expected, with a positive revision to the previous figure. A strong report may cause the market to reduce the number of rate cuts projected in 2024, but a weak release may cause them to climb, so the USD will likely follow suit.