11/12/2024  

Global Financial Markets Outlook: Central Bank Policies and Key Economic Indicators

Foreign Exchange Markets

• The EUR/USD pair remains subdued near 1.0530, reflecting strength in the US Dollar (USD) driven by rising US Treasury yields and market caution ahead of the November Consumer Price Index (CPI) release (December 11th). The US CPI is projected to rise to 2.7% YoY, while the core CPI is anticipated at 3.3%. A strong CPI print could dampen expectations for Federal Reserve rate cuts, although markets currently price an 85.8% probability of a 25 basis point (bps) reduction by the next meeting.
• In Europe, the Euro faces pressure amid expectations that the European Central Bank (ECB) will lower the Deposit Facility Rate by 25 bps to 3.0%. ECB President Christine Lagarde has cautioned about the downside risks to Eurozone growth, while political and geopolitical uncertainties further weigh on the currency. The EUR/GBP cross trades defensively around 0.8245, as the Bank of England (BoE) is anticipated to move more gradually in rate reductions compared to the ECB.

Interest Rates and Central Bank Policies

• The ECB is widely expected to deliver a quarter-point rate cut on Thursday (December 12th), marking its fourth consecutive reduction. Markets also foresee additional easing, potentially lowering the deposit rate to 2%. Persistent economic challenges and dovish signals from the ECB strengthen expectations for a prolonged easing cycle.
• The BoE, in contrast, is likely to maintain its current rate of 4.75% in December, supported by a rebound in UK inflation above its 2% target. Traders anticipate a slower pace of easing, with only three rate cuts expected through 2025, which supports GBP strength against the Euro.

US Treasury Yields and the Dollar Index

• The US Dollar Index (DXY) holds steady around 106.40, benefiting from higher 2-year and 10-year Treasury yields, which currently stand at 4.16% and 4.23%, respectively. The market awaits CPI data, which could shape expectations for Federal Reserve policy moves. A deceleration in inflation could reinforce the current pricing of rate cuts, while stronger data may support a more hawkish stance.

GBP/USD Performance

• The GBP/USD pair extends its rally, trading near 1.2780, driven by expectations of a stable BoE policy rate. Positive sentiment is further fueled by anticipated growth in UK October GDP and industrial production figures, which follow weaker September data. However, the pair’s gains could be capped by USD strength tied to inflation data and higher yields.

Economic Outlooks

• The Eurozone’s medium-term outlook remains challenging, with growth concerns exacerbated by political instability in France and Germany, as well as external geopolitical risks. In contrast, the UK economy shows signs of resilience with expectations of improved GDP and production data.
• In the US, inflation dynamics remain pivotal for policy direction, as any indication of stalling could reduce market confidence in near-term rate cuts.

Conclusion

This week is poised to be shaped by pivotal central bank decisions and key economic data releases. While the ECB is expected to accelerate its easing cycle, the BoE’s measured approach offers relative support for the GBP. Meanwhile, US inflation data will likely determine the trajectory of the USD and broader market sentiment.

IMPORTANT DISCLAIMER

The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.