Eyes on central banks decision this week

Eyes on central banks decision this week – European stocks dipped on Monday, affected by a disappointing retail report from China that dampened investor sentiment. In contrast, Bitcoin reached a new all-time high. 

The Stoxx 600 index decreased by 0.1%, positioning it for a third consecutive day of losses. US stock futures remained relatively stable. Bloomberg’s dollar index ended a six-day rise, while Treasury yields increased slightly. 

Although China’s retail sales climbed by 3% year-over-year, this was below the 5% growth anticipated by economists polled by Bloomberg. This data follows last week’s letdown for traders when Beijing pledged to enhance consumption but did not provide any specific fiscal stimulus details.

France downgraded

French bonds underperformed compared to peers as private-sector business activity contracted for the fourth consecutive month, exacerbated by the government’s collapse over a budget dispute, which has eroded confidence. This information comes on the heels of Moody’s Ratings unexpected decision to downgrade the country’s credit rating late Friday.

In Germany, Chancellor Olaf Scholz is likely to face a confidence vote on Monday, which could lead to new elections at a time when Europe’s largest economy is navigating a decline.

Euro area services PMI recovery

The private sector in the euro area contracted less than expected in December, primarily due to a stronger-than-anticipated contribution from the services sector.

S&P Global’s Composite Purchasing Managers’ Index rose to 49.5 from 48.3 the prior month, staying just below the 50 mark that distinguishes growth from contraction. Analysts had predicted the index would remain largely unchanged from November.

Although the manufacturing downturn, now ongoing for three years, continues, the services index has rebounded above 50, indicating that hopes for a gradual recovery are still alive.

Focus on Fed, BoJ, and BoE

Equity markets started off slowly on Monday as investors prepare for the last full trading week of the year, which includes important central bank meetings from the Federal Reserve, Bank of Japan, and Bank of England. Some investors might also choose to take profits from this year’s nearly 20% surge in global stocks.

Swaps traders are currently anticipating about three quarter-point rate cuts by the Fed over the next year. Just a week ago, they were seeing better-than-even odds for a fourth cut. 

The Bank of England started the year with investors anticipating six interest-rate cuts, a sudden move expected to invigorate the UK economy. By the end of 2024, it will have borrowing costs a full percentage point higher than projected a year earlier.

The British central bank is likely to keep rates steady at 4.75% during its meeting on Thursday and continue emphasizing that a “gradual approach to removing policy restraint is appropriate.” While BOE Governor Andrew Bailey has indicated four cuts might occur throughout 2025, markets — possibly wary from their bold predictions last year — are only factoring in three cuts beginning in February.

The pricing before the BOJ’s final policy meeting of the year is restrained compared to earlier ones, indicating a belief that the central bank will keep rates steady. While the median economist forecast suggests the BOJ will maintain its position, several believe a rate increase is likely—similar to the surprise hike during the July meeting that caught markets off guard.

However, this time, the BOJ might need to be mindful of the implications of raising rates, especially with Prime Minister Shigeru Ishiba aiming to pass his stimulus plan and budget. If this becomes a consideration, Governor Kazuo Ueda and his team might take the chance to get investors ready for a January hike, potentially sparking a modest rally in the yen.

DXY rally faces a reality check

Wall Street is beginning to lose faith in the dollar, as President-elect Donald Trump’s policies and the Federal Reserve’s anticipated interest-rate cuts are likely to stress the greenback in the latter part of 2025.

Various sell-side strategists, including those from Morgan Stanley and JPMorgan Chase, now predict that the world’s reserve currency could peak as soon as mid-next year before starting a downward trend. Societe Generale expects the ICE US Dollar Index to decline by 6% by the end of next year.

This year, the dollar has already surged, aiming for its largest rally since 2015, spurred by Trump’s electoral victory and robust economic data that led traders to lower their projections for Fed rate cuts next year.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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