December Rate Decisions Set Stage for 2025
Wednesday, December 18, Week 50
Currency Strength Rankings:
USD - VERY STRONG (unchanged): November retail sales beat at 0.7%, core CPI steady at 3.3% YoY through October, S&P Global flash composite PMI rose to 56.6 in December
CHF - STRONG (unchanged): October CPI at 0.6% YoY, KOF Economic Barometer rose to 101.8 vs 100.0 forecast, benefiting from safe-haven flows amid European uncertainty
JPY - STRONG (↑ from Moderately Strong): Services PMI improved to 51.4, machinery orders rose 2.1% MoM vs 1.2% forecast, core CPI steady at 2.3% YoY
EUR - MODERATELY WEAK (↓ from Neutral): Manufacturing PMI stagnant at 45.2, German political crisis intensifies, composite PMI at 48.1
GBP - MODERATELY WEAK (unchanged): October GDP contracts 0.1% MoM, November inflation rises to 2.3% YoY, manufacturing PMI falls to 47.3
CAD - WEAK (unchanged): Unemployment spikes to 6.8% from 6.5%, November inflation eases to 1.9%, manufacturing PMI at 52.0
AUD - VERY WEAK (unchanged): Q3 GDP disappoints at 0.3% QoQ, manufacturing PMI drops to 48.2, China exposure risks intensify
NZD - VERY WEAK (unchanged): Manufacturing PMI falls to 45.5, Q3 current account deficit widens to NZ$10.58B, RBNZ maintains dovish stance
USD: VERY STRONG - America's Resilient Economy Powers Dollar Dominance
The United States, with a GDP of $27.721 trillion as of 2023, is transitioning to a second Trump administration following his recent election victory. The Federal Reserve, chaired by Jerome Powell through May 2026, currently maintains a target rate range of 4.50-4.75%. Geopolitically, escalating trade tensions with China and the potential for major tariff implementation under Trump's administration create significant uncertainty. Critical upcoming events include today's Federal Reserve rate decision and December 20th's PCE price index data.
The dollar's very strong fundamental position is reinforced by consistently robust economic data. Retail sales rose 0.7% MoM in November versus 0.5% forecast, while core inflation remains sticky at 3.3% YoY through October. The S&P Global flash composite PMI strengthened to 56.6 in December, marking the strongest performance since March 2022. Manufacturing remains in contraction at 48.3, though this outperforms most global peers.
The dominant theme continues to be U.S. economic outperformance relative to other major economies. Recent data supports this narrative - November's jobs report showed 227K gains versus 200K forecast, while retail sales data on December 17th beat expectations at 0.7% versus 0.5%. The emerging theme centers on the timing and pace of Fed rate cuts in 2025, particularly given Trump's proposed policies that could stoke inflation through tariffs and fiscal stimulus.
Trading Economics forecasts project the DXY reaching 107.19 by Q4 2024, with 10-year yields at 4.32% and S&P 500 at 6,047.91. Given current economic momentum and yield differentials, the currency and yield targets appear achievable, though equity projections may prove optimistic amid policy uncertainty.
Key Upcoming Events:
Fed Rate Decision (Dec 18) - Powell press conference to outline 2025 guidance
GDP Final Q3 (Dec 19) - Growth confirmation expected at 2.8%
PCE Price Index (Dec 20) - Critical inflation gauge for Fed policy
Initial Jobless Claims (Dec 26) - Labor market health check
Goods Trade Balance (Dec 27) - Impact of strong dollar on trade flows
Trading Thesis: USD presents compelling long opportunities against EUR given policy divergence and European political risks. Also attractive against NZD and CAD due to opposing central bank stances.
CHF: STRONG - Safe Haven Appeal Intensifies Amid European Political Crisis
The franc maintains its strong fundamental position despite the recent rate cut, supported by Switzerland's robust external position and contained inflation environment. October's CPI print of 0.6% YoY and the November KOF Economic Barometer's rise to 101.8 versus 100.0 forecast demonstrate economic stability. COT data shows leveraged funds increasing net short positions to 16,120 contracts, suggesting potential for short covering rallies.
The dominant theme remains safe-haven flows driven by European political instability, particularly following Germany's coalition collapse on December 13th and ongoing French budget negotiations. The emerging theme focuses on potential SNB intervention as EUR/CHF approaches historic lows, with the bank historically active in preventing excessive franc strength.
Trading Economics projects USD/CHF at 0.90 by Q4 2024, with the SMI reaching 11,737.79. Given intensifying European political risks and safe-haven flows, these targets may prove conservative for the franc's strength.
Key Upcoming Events:
Trade Balance (Dec 19) - External position assessment
Credit Suisse ZEW Survey (Dec 20) - Economic sentiment gauge
KOF Leading Indicators (Dec 27) - Forward-looking economic assessment
Trading Thesis: CHF offers attractive long opportunities against EUR given regional political risks and safe-haven status. However, position sizing requires careful consideration given intervention risk.
JPY: STRONG - Policy Shift Expectations Drive Yen Strength
Japan, the world's third-largest economy with a $4.2 trillion GDP, operates under Prime Minister Shigeru Ishiba's leadership. The Bank of Japan, led by Governor Kazuo Ueda, maintains a 0.25% short-term interest rate with growing speculation about further tightening. Geopolitical factors include regional tensions with North Korea and China's economic slowdown. Critical events include tomorrow's BOJ rate decision and upcoming inflation data.
The yen's upgrade to strong reflects mounting expectations of BOJ policy normalization. The S&P Global Services PMI improved to 51.4 in December, while machinery orders rose 2.1% MoM versus 1.2% forecast. Core inflation remains steady at 2.3% YoY, supporting the case for policy adjustment. COT data shows Asset Managers increasing net long positions to 4,031 contracts, signaling growing confidence in yen strength.
The dominant theme centers on BOJ policy normalization speculation, with Governor Ueda recently suggesting rate hikes are "nearing." This narrative gained momentum after December 16th's manufacturing PMI data showed continued resilience at 49.5. The emerging theme focuses on intervention risk as USD/JPY approaches key technical levels, though policy shift expectations may provide natural support.
Trading Economics projects USD/JPY at 150.90 by Q4 2024, with the Nikkei 225 at 38,943.07. Given growing speculation about BOJ policy normalization, these targets may underestimate yen strength potential.
Key Upcoming Events:
BOJ Rate Decision (Dec 19) - Critical policy guidance
National CPI (Dec 20) - Key inflation data point
Trade Balance (Dec 19) - External position update
Trading Thesis: JPY presents attractive long opportunities against risk-sensitive currencies (AUD, NZD) given potential policy normalization and safe-haven status.
EUR: MODERATELY WEAK - Political Crisis Deepens Currency Vulnerability
The Euro Area, representing a $19.40 trillion economy, faces significant challenges under ECB President Christine Lagarde's leadership. The ECB maintains a deposit rate of 3.15% following December's 25bps cut. Germany's coalition collapse on December 13th has created political uncertainty, while French budget negotiations add further pressure. Key events include tomorrow's German IFO business climate data and eurozone consumer confidence figures.
The euro's downgrade reflects deteriorating conditions and political instability. The HCOB Flash Eurozone Manufacturing PMI remains stagnant at 45.2 in December, while German industrial production fell 1.0% MoM in October. COT data shows leveraged funds holding significant net short positions, with Asset Managers also maintaining bearish positioning.
The dominant theme remains the impact of German political instability on regional economic policy and growth prospects. Germany's coalition collapse triggered a sharp decline in business confidence, with the ZEW Economic Sentiment falling to 17 in December from 24.6 previously. The emerging theme focuses on ECB policy divergence from global peers amid weakening economic data.
Trading Economics forecasts EUR/USD at 1.05 by Q4 2024, with the STOXX 50 at 4,914.45. These targets appear achievable given current political and economic headwinds.
Key Upcoming Events:
German IFO Business Climate (Dec 19) - Business sentiment check
Consumer Confidence Flash (Dec 20) - Household outlook assessment
Current Account (Dec 19) - External position update
Trading Thesis: EUR warrants short exposure against both USD and CHF given political instability and economic weakness.
GBP: MODERATELY WEAK - Growth Concerns Weigh on Sterling
The United Kingdom, a $3.588 trillion economy, is led by Prime Minister Keir Starmer. The Bank of England, under Governor Andrew Bailey, cut rates by 25bps to 4.75% in November amid slowing growth. Geopolitical concerns center on trade policy uncertainty following Trump's election victory. Critical events include tomorrow's BOE rate decision and retail sales data on December 20th.
Sterling's moderately weak status reflects persistent economic challenges. GDP contracted 0.1% MoM in October, while manufacturing PMI declined to 47.3 in December from 48.0. Annual inflation rose to 2.3% in October, remaining above target. COT data shows leveraged funds holding 45,219 net short contracts, indicating significant bearish positioning.
The dominant theme remains UK growth concerns and their impact on BOE policy. October's GDP contraction, reported December 13th, reinforced this narrative. The emerging theme focuses on earlier rate cut expectations following a string of weak economic data, including declining retail sales and factory output.
Trading Economics projects GBP/USD at 1.27 by Q4 2024, with the FTSE 100 at 8,297.19. These forecasts may prove optimistic given current headwinds and deteriorating data.
Key Upcoming Events:
BOE Rate Decision (Dec 19) - Policy stance and forward guidance
Retail Sales (Dec 20) - Consumer spending assessment
Public Sector Net Borrowing (Dec 21) - Fiscal position update
Trading Thesis: GBP presents short opportunities against USD given diverging economic momentum and policy paths.
CAD: WEAK - Labor Market Deterioration Drives Dovish Outlook
Canada, with a GDP of $2.215 trillion, operates under Prime Minister Justin Trudeau's leadership. The Bank of Canada, led by Governor Tiff Macklem, cut rates by 50bps to 3.25% this month amid growth concerns. Geopolitical factors include Trump's proposed 25% tariffs on Canadian imports. Key events include tomorrow's CPI data and retail sales figures.
The Canadian dollar's weak position reflects deteriorating fundamentals. November's unemployment rate jumped to 6.8% from 6.5%, while inflation eased to 1.9% YoY from 2.0%. Manufacturing PMI improved to 52.0 but remains vulnerable to trade policy shifts. COT data reveals dealers holding substantial net short positions.
The dominant theme centers on monetary policy divergence with the Federal Reserve, particularly following the BOC's recent dovish shift. The labor market deterioration reported December 8th accelerated this narrative. The emerging theme focuses on trade policy uncertainty following Trump's election and tariff threats.
Trading Economics forecasts USD/CAD at 1.42 by Q4 2024, with the S&P/TSX at 25,515.54. These targets align with current fundamentals and policy trajectory.
Key Upcoming Events:
CPI Data (Dec 19) - Critical inflation update
Retail Sales (Dec 20) - Consumer spending health
GDP Monthly (Dec 22) - Growth trajectory assessment
Trading Thesis: CAD remains an attractive short candidate against USD given policy divergence and economic weakness. Growing tariff risks support more aggressive positioning.
AUD: VERY WEAK - China Exposure Amplifies Downside Risks
Australia, a $1.802 trillion economy, operates under Prime Minister Anthony Albanese. The RBA, led by Governor Michele Bullock, maintains a 4.35% cash rate amid inflation concerns. China's economic slowdown and potential US tariffs create significant headwinds. Critical events include the RBA minutes release and employment data.
The aussie's very weak status reflects multiple challenges. Q3 GDP disappointed at 0.3% QoQ, manufacturing PMI fell to 48.2 in December, and services activity contracted to 50.4. Business confidence plunged to -3 in November from a near two-year high of 5. COT data shows Asset Managers holding substantial net short positions.
The dominant theme remains China growth concerns impacting Australian exports. Recent Chinese retail sales and industrial production data missed expectations, reinforcing this narrative. The emerging theme focuses on regional trade uncertainty following Trump's election victory and tariff threats.
Trading Economics projects AUD/USD at 0.64 by Q4 2024, with the ASX 200 at 8,422.22. These forecasts may prove optimistic given mounting external risks.
Key Upcoming Events:
Employment Data (Dec 19) - Labor market health
RBA Meeting Minutes (Dec 19) - Policy insights
Consumer Confidence (Dec 20) - Sentiment check
Trading Thesis: AUD presents compelling short opportunities against both USD and JPY given weak fundamentals and external risks. China exposure warrants larger position sizing.
NZD: VERY WEAK - Policy Divergence Drives Currency Weakness
New Zealand, with a GDP of approximately $270 billion, is led by Prime Minister Christopher Luxon. The RBNZ, under Governor Adrian Orr, cut rates to 4.25% amid economic weakness. Key concerns include China's slowdown and potential trade disruption. Critical events include Q3 GDP data and the trade balance report.
The kiwi maintains its very weak fundamental position. Manufacturing PMI fell to 45.5 in November, marking sustained contraction. The current account deficit widened to NZ$10.58 billion in Q3, while business confidence remains subdued. COT data shows growing bearish positioning among institutional traders.
The dominant theme centers on RBNZ's dovish stance and policy divergence with major peers. The manufacturing sector's continued weakness, confirmed December 15th, reinforces this narrative. The emerging theme focuses on deteriorating economic data's implications for monetary policy.
Trading Economics forecasts NZD/USD at 0.58 by Q4 2024, with the NZX 50 at 12,831.18. These targets appear achievable given current headwinds.
Key Upcoming Events:
GDP Data (Dec 19) - Q3 growth assessment
Trade Balance (Dec 19) - External position update
Credit Card Spending (Dec 22) - Consumer activity gauge
Trading Thesis: NZD remains the most attractive short candidate among majors given weak fundamentals and dovish central bank stance. Consider larger position sizes against USD and JPY.
Conclusion
The currency landscape heading into year-end shows stark divergence in fundamental strength. The dollar's dominance persists through robust economic data, while the yen's potential policy shift and deepening European political challenges reshape relative valuations. Safe-haven currencies benefit from growing uncertainty, while commodity currencies face mounting headwinds from trade policy risks and China's slowdown.
Key Events (December 18-27, 2024):
Federal Reserve Rate Decision (Dec 18) - Policy guidance and dot plot update
Bank of Japan Rate Decision (Dec 19) - Potential policy normalization signals
Bank of England Rate Decision (Dec 19) - Growth and inflation assessment
Multiple GDP Releases (Dec 19-22) - NZ, UK, and Canada growth data
US PCE Price Index (Dec 20) - Critical inflation gauge for Fed policy
Sources: Bank of England, European Central Bank, Federal Reserve, Bank of Japan, Bank of Canada, Reserve Bank of New Zealand, Reserve Bank of Australia, Swiss National Bank, Bloomberg, Reuters, Trading Economics.