USD Firm on Cautious Fed Easing Path

January 08, 2025
6 min read

USD Firm on Cautious Fed Easing Path

  • US economy remains in good shape and argues for a cautious Fed easing cycle.
  • Sweden inflation was cooler than anticipated in December. SEK underperforms as rate cut bets increase.
  • Australia’s November CPI indicator reinforced the case for the RBA to start easing in February.

USD is holding ground and 10-year Treasury yields keep powering forward supported by encouraging US economic activity. The more favorable US economic outlook relative to other major economies continue to support the fundamental USD uptrend.

The ISM Services index rose more than expected in December to 54.1 (consensus: 53.5) from 52.1 in October. The details are consistent with solid growth momentum as the Business Activity Index improved to a three-month high at 58.2 and the Prices Index surged to 64.4, the first above 60 since January 2024.

Meanwhile, the JOLTS November data remained consistent with a healthy US labor market. The job opening rate rose 0.1pts to 4.8%, which should keep the unemployment rate quite low in historical terms, and the layoff rate was unchanged at 1.1% suggesting there is no layoff spiral underway. The December ADP employment report is up next and is expected at 139k vs. 146k in November (1:15pm London).

Fed Governor Christopher Waller gives a speech on the economic outlook (1:00pm London) and the FOMC December meeting minutes are published (7:00pm London). At that meeting, the Fed reduced the funds rate 25bps to 4.25%-4.50% (widely expected) but signaled a slower pace of easing. Fed funds futures fully price-in a 25bps cut in June.

Overall, the US economy is still tracking well above long-run annual trend growth of 1.8%. The Atlanta Fed GDPNow model estimates Q4 growth at 2.7% SAAR up from 2.4% on January 3. The next GDPNow update is published today.

SEK is underperforming most major currencies. Sweden inflation was cooler than anticipated in December and leaves plenty of room for the Riksbank to ease further at its January 29 meeting. Headline CPI fell 0.8pts to 0.8% y/y (consensus: 1.0%, Riksbank: 1.26%), CPIF dropped 0.3pts to 1.5% y/y (consensus: 1.7%, Riksbank: 1.83%), and CPIF ex-energy declined 0.3pts to 2.1% y/y (consensus: 2.2%, Riksbank: 2.23%). The market has fully priced-in a 25bps Riksbank rate reduction in January and 63% odds of an additional 25bps cut.

NOK and CAD are outperforming as falling US crude inventories underpin higher crude oil prices. Still, President-elect Donald Trump threat to use economic force to make Canada part of the US is a drag for CAD.

AUD/USD is trading on the defensive. Australia’s November CPI indicator reinforced the case for the RBA to start easing at the February 18 meeting. The policy-relevant trimmed mean CPI fell to 3.2% y/y from 3.5% in October, matching the low seen in September. While headline CPI was a little hotter than anticipated at 2.3% y/y (consensus: 2.2%) vs. 2.1% in October, the rise was largely due to the more modest impact of electricity rebates. Odds of a 25bps RBA cash rate cut in February rose from 68% to 74% after the CPI data.

USD/CNH is up around 7.3500 despite the PBOC’s effort to curtail CNH weakness. The PBOC continues to set a stronger yuan’s reference rate at 7.1887 relative to analysts’ estimate of 7.3415. The 1,528 pips gap between the fixing and estimates is the widest since April. Nevertheless, China’s record yield differential with the US will maintain upward pressure on USD/CNH.
 

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