- Hard to lean against the dollar’s upswing ahead of the Fed’s December rate decision.
- UK Autumn budget takes the spotlight. Pay attention to the projected fiscal drag and planned gilt sales.
- RBNZ poised to cut rates 25bps to 2.25%. RBNZ may signal it plans to keep rates at that level for some time.
USD has powered above its 200-day moving average as division within the FOMC clouds the prospect of a December Fed funds rate cut. Last week, Fed funds futures slashed odds of a December cut from nearly 50% to as low as 27% before snapping back toward 70% following a dovish speech by the influential New York Fed President John Williams on Friday.
Don’t Fight It
It’s hard to go against the USD upswing ahead of the December 10 FOMC decision. The November PMI shows US private sector growth continues to edge over other major economies. And, convincing the “many” FOMC participants that favor keeping rates unchanged the rest of the year to lean towards a cut will be challenging amid the void in key US statistics.
The November employment and CPI prints are due after the FOMC December 9-10 meeting on December 16 and 18, respectively. The October JOLTS report - on December 9 - is the only major jobs check ahead of Fed showtime.
We are sticking to our view that the FOMC will deliver a follow-up 25bps cut to 3.50%-3.75% at the conclusion of its December 9-10 meeting. The US nonfarm payrolls report for September was good but still points to a soft labor market backdrop. Excluding the non-cyclical health care and social assistance sector, the economy added just 6k jobs on average in July, August, and September. Indeed, Philadelphia Fed President Anna Paulson cautioned that “historically, when job gains are concentrated in acyclical sectors like healthcare, that is a precursor to a slowdown."
Meanwhile, upside risks to inflation remain contained. Average hourly earnings growth (3.8% y/y) is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual non-farm productivity growth of around 2%.
The November Conference Board (CB) consumer confidence index (Tuesday) and the Fed Beige Book (Wednesday) will offer fresh insights on the labor market. In October, the Beige Book highlighted that “demand for labor was generally muted” while the CB consumer report offered mixed readings on the labor market. The labor differential index (jobs plentiful minus jobs hard to get) improved slightly but consumers were more worried about the labor market outlook over the next six months.
Other noteworthy US data due this week: September retail sales (Tuesday), September PPI (Tuesday), September house price index (Tuesday), weekly jobless claims (Wednesday), and September durable goods orders (Wednesday). US financial markets will be closed on Thursday for Thanksgiving and have reduced hours on Friday.
UK Autumn Budget Bite
UK Chancellor of the Exchequer Rachel Reeves will deliver the Autumn Budget Statement Wednesday. To shore up the deteriorating fiscal position, the government is expected to prioritize tax hikes over spending cuts. The two key factors that will matter for GBP will be the extent of the projected fiscal drag next year (measured by the change in the cyclically adjusted primary budget) and the planned amount of total new gilt sales.
For reference, the Spring Budget (released in March) forecasted a cyclically adjusted primary budget balance of -0.6% of GDP for 2025/26 and 0% of GDP in 2026/27, implying a fiscal drag of -0.6% of GDP next year. Debt financing for 2025/26 was calculated to be met with £299.2 billion of total gilt sales.
Bottom line: we expect GBP to keep underperforming most major currencies. Contractionary UK fiscal policy and disappointing domestic economic activity will leave room for the Bank of England to deliver more easing than is currently priced in (64bps in the next twelve months).
RBNZ: One More and Done?
The RBNZ is expected to cut the Official Cash Rate (OCR) by 25bps to 2.25% (Tuesday). At its last October 8 meeting, the RBNZ slashed the OCR by 50bps to 2.50% and stressed it “remains open to further reductions in the OCR.” The swaps market has more than fully priced-in a 25bps cut this week, with rates bottoming at 2.25%.
The focus instead will be on the RBNZ’s updated OCR forecast. In its August Monetary Policy Statement, the RBNZ projected the OCR to bottom at 2.50%. Our base case is the RBNZ signals the OCR will be kept at 2.25% after this week’s cut. That would be a hawkish move and underpin a modest NZD recovery.
New Zealand Q3 employment and inflation are tracking the RBNZ’s August projection, while the October ANZ business outlook survey suggests green shoots are emerging. Moreover, outgoing RBNZ Governor Christian Hawkesby may want to leave policy option flexibility to new Governor Anna Breman ahead of her December 1 start.
Nevertheless, the risk is the RBNZ trims its OCR forecast closer to the lower bound of its estimated neutral range (1.60%-4.20%). New Zealand underlying inflation and 2-year inflation expectations are stable within the RBNZ’s 1 to 3% target range.
Australia CPI to Keep RBA Sidelined
Australia October CPI is the highlight (Tuesday). This will be the first complete monthly measure of the CPI following the Australian Bureau of Statistics transition away from the quarterly report. Headline CPI is expected at 3.6% y/y vs. 3.5% in September and the policy-relevant trimmed mean CPI is seen at 2.9% y/y vs. 2.8% in September. The RBA projects headline and trimmed mean annual inflation of 3.3% and 3.2% by December, respectively.
We remain constructive on AUD/USD. The RBA is on hold, the Fed has scope to deliver additional easing, and global economic activity is resilient. However, the short-term technical picture for AUD/USD is not pretty as the cross has broken below its 200-day moving average with the next key support offered at 0.6400.
Eurozone: Watch the Leading Data
We think the ECB is done easing as policy is close to neutral while the Fed has more cuts in the pipeline (87bps price in the next twelve months) given that policy is still restrictive. Bottom line: relative ECB/Fed policy stance suggests EUR/USD will struggle to sustain an undershoot below its 200-day moving average (1.1405).
The Eurozone economy has continued to grow despite the challenging global environment. The German November IFO business index (Monday) will likely remain indicative of an ongoing recovery in Eurozone economic activity. The preliminary November CPI data for Germany, France, Spain and Italy (all due Friday) will offer a preview of the Eurozone’s print on December 2.
The ECB Account of its October 29-30 policy meeting is poised to be a non-event (Thursday). In her post meeting press conference, ECB President Christine Lagarde stressed that monetary policy settings remain in a “good place” and that there was “absolute unanimity” to keep the policy rate unchanged at 2.00% for a third consecutive meeting. Lagarde delivers keynote address at an AI event (Monday) and the ECB publishes its twice-yearly Financial Stability Review (Wednesday).
Q3 GDP Data Quartet
Canada, Sweden, Norway, and Switzerland all report Q3 real GDP this week. The data is unlikely to move the needle on these countries’ central bank guidance and should have little effect on currency markets.
The Norges Bank projects Q3 mainland real GDP at 0.4% q/q vs. 0.6% in Q2 (Wednesday). The Norges Bank has penciled in one 25bps cut to 3.75% by Q4 2026. That seems reasonable given persistently above target inflation in Norway.
The Bank of Canada (BOC) projects Q3 annualized real GDP at 0.5% q/q vs. -1.6% in Q2 (Friday). BOC is expected to keep rates on hold at 2.25% over the next twelve months. Rate hikes are priced-in over the next two years.
The Riksbank projects Q3 real GDP at 0.5% q/q vs. 0.5% in Q2 (Friday). The Riksbank is done easing and expects the policy rate to remain at 1.75% “for some time to come.” Markets imply rate hikes in the next twelve months.
Swiss Q3 real GDP is seen at -0.4% q/q vs. 0.1% in Q2 (Friday). The economy should recover quickly following the trade deal with US reached on November 14. As such, the bar is high for the Swiss National Bank to cut the policy rate below the current level of 0.00%.
Beyond the Majors
Bank of Israel is widely seen cutting rates by 25bps to 4.25% (Monday). That would be the first cut since January 2024. ILS is overvalued on a real effective exchange rate basis. But Israel’s positive real interest rates and favorable balance of payment backdrop remain important tailwinds for ILS.
Bank of Korea is expected to leave rates at 2.50% for a fourth consecutive meeting and stick to its easing bias (Thursday). Nevertheless, Bank of Korea is likely done easing which limits KRW downside. The swaps curve implies steady rates over the twelve months and rate hikes in the next two years.
