Quiet End of Year for Central Banks
In the foreign exchange market, volatility remains very low. Throughout the year, it stayed below 1% on average, and this is still the case today. There is only one exception: daily volatility on the USD/JPY temporarily soared to 2.5% during the summer when American hedge funds panicked and unwound their unhedged positions on the yen after the Bank of Japan normalized its monetary policy. This was the only time this year that we saw a spike in forex market volatility. This is mainly due to the continuous intervention of central banks in financial markets through asset purchase operations, which have had the effect of compressing the risk premium, including on currencies.
The macro point
A segment of the market is uncertain about the outcome of this week's Fed meeting. It's clear to us. They will lower their key interest rate by 25 basis points. Their primary objective is now to support employment. As expected, the European Central Bank (ECB) reduced its key interest rate by 25 basis points. Market expectations were low. They confirmed, unsurprisingly, that downside risks weigh on growth and confirmed that the neutral rate around 2.5% will be reached by next summer. This did not bring any new elements to the market. The issue of state debt remains in the background: the spread between France and Germany is normalizing while the spread between Italy and Germany is at a three-year low even though the ECB is a net seller of Italian bonds. Everything is going well for the central bank. It's a quiet end of the year. As we anticipated, the Bank of Canada (BoC) made a strong move with a 50 basis point cut. We expect further cuts to follow, at least three of 25 basis points each in 2025, which would bring the terminal or neutral rate to 2.50% around next June. Note that we do not rule out the BoC lowering rates more than expected if the macroeconomic context continues to deteriorate. On the side of the Swiss National Bank (SNB), a small year-end surprise. The central bank lowered its key interest rate by 50 basis points while the consensus expected a 25 basis point cut, aligning with the ECB. It seems the new governor, Mr. Schlegel, wanted to demonstrate his determination to combat low inflation (by lowering the key interest rate, he hopes to weaken the Swiss franc, which could increase imported inflation). Important point: the central bank's statement no longer refers to the excessively high level of the Swiss franc. It's surprising. The currency level is at the heart of the Confederation's deflationary problems. Finally, in Australia, the Reserve Bank maintained its monetary policy unchanged, as expected. The statement, however, suggested that we are heading towards a decline in inflation, which could trigger a rate cut process as early as next February (this is the most optimistic scenario).
Technical point
On the EUR/USD, the underlying trend remains bearish. The pair was very volatile during Thursday's session, following the ECB decision. We continue to target a low point at 1.0350, but it should not be reached this year. The decline is accelerating against the British pound, with a drop of 0.4% in one week. This is just the beginning.
The supports and resistances shown below indicate the highs and lows within which prices are expected to evolve throughout the week. | Weekly Supports | | Weekly Resistances | |
|---|
| S2 | S1 | R1 | R2 |
| EUR/USD | 1.0399 | 1.0390 | 1.0654 | 1.0690 |
| EUR/GBP | 0.8222 | 0.8210 | 0.8301 | 0.8311 |
| EUR/CHF | 0.9249 | 0.9219 | 0.9390 | 0.9433 |
| EUR/CAD | 1.4755 | 1.4690 | 1.4856 | 1.4888 |
| EUR/JPY | 157.99 | 157.11 | 160.90 | 161.31 |
Announcements to follow
End of the line for central banks this week. The Bank of England (BoE) is expected to lower its key interest rate by 25 basis points, while the Bank of Japan (BoJ) should continue the normalization process with a 15 basis points rate hike. This is already priced into the market. In recent weeks, American funds have sold euros to buy yen in anticipation of the rate hike. Some profit-taking cannot be ruled out following the decision.
The Federal Reserve (Fed) meeting will obviously take center stage. Analysts expect a pause with the main argument that Trump's election significantly changes the situation for the central bank. We do not share this view and still expect a 25 basis points rate cut. It's hard to see the Fed pausing when the easing cycle has barely begun. Moreover, there is no indication that Trump's policy is truly inflationary. Let's not forget that the new American president's aim is not to implement tariffs but to use them as leverage to gain concessions from partners. In the European case, we have little doubt that Europe will try to show goodwill. In the immediate term, a change in monetary policy would make no sense.
Please note that the Currency Weekly is going on vacation, and we look forward to seeing you again on January 6, 2025. We wish you very happy holidays, see you next year!
You will find below the publications and events expected to have a major impact on the evolution of exchange rates.| Day | Time | Country | Indicator | What to expect? |
|---|
| 17/12/2024 | 10:00 | ALL | IFO Index (December) | Previous at 85.7. |
| 18/12/2024 | 20:00 | USA | Central bank meeting | 25 basis points rate cut. |
| 19/12/2024 | 04:00 | JAP | Central bank meeting | 15 basis points rate hike. |
| 19/12/2024 | 13:00 | UK | Central bank meeting | 25 basis points rate cut. |
The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not be used as the basis or taken into account as an incentive to engage in any investment.