We come to the last couple of trading weeks of the year after the usual feast of December major central bank rate decisions. There is very little top tier data on show in the coming days. But the hawkish FOMC meeting, in contrast to most of its peers, has set the scene for volatility ahead. Meanwhile, the Santa rally appears to have gone missing so far this year, though the days between the holiday period and just after new year is typically when this bullish move takes place.

The Fed’s favoured inflation measure missed estimates on Friday, denting the dollar’s sprint to the finish line this year. But the greenback is ending 2024 with three exceptionally strong months, up over 7% since its lows in at the start of October. For sure, Donald Trump’s victory has fuelled the surge. But Fed Chair Powell clearly delivered a hawkish message last week, highlighting that the easing cycle has entered a “new phase”. That entails the Fed looking to slow down the pace of rate cuts with a median projection of now just two 25bps moves compared to four in the prior September projections.

Inflation is rearing its head again with the ‘last mile’ to the Fed’s 2% target playing hard to get. The hawkish twist by policymakers was down to their upwardly revised inflation forecast of 2.5%, in 2025, from the previous 2.1% estimate. Notably, the longer term dot has now hit 3% and markets themselves price in just 40bps of cuts for next year.

We are yet to see any seasonal weakness in the dollar, but that should only have a short term impact on USD. Further out, interest rate differentials do likely mean most major currencies will continue to struggle versus the buck. There is a wide variety of views among the FOMC and some officials have included the incoming possibility of inflationary policies, whilst others have not. This leaves us wholly dependent on data going forward, plus betting on the uncertainty of what Trump 2.0 brings.

A stronger dollar is a hugely consensus call going into 2025. The Fed will not be providing as much monetary stimulus as first thought. This will hinder pro-cyclical currencies like the euro and weigh on commodity currencies. They have already been under pressure due to faltering Chinese growth and the prospect of Trump’s tariff agenda. Stocks too could falter as the obvious premium built on policy easing has now been reined in. At the same time, it is tough to bet against US exceptionalism, even though we are conscious it seems like very much a one-way bet at present.

In Brief: major data releases of the week

Monday, 23 December 2024

– US Consumer Confidence: Consensus expects a reading of 113.0, up from the November print of 111.7. Post election, market gains have boosted confidence as US exceptionalism goes into overdrive, taking the dollar with it.  

Tuesday, 24 December 2024

– RBA Minutes: RBA’s forward guidance at its recent meeting was more dovish than before. It delivered no new economic forecasts, but still confirmed that the board had gained more confidence on inflation returning to target. The bank also acknowledged the recent downside surprise in Q3 GDP. In turn, Governor Bullock did not write off the possibility of a cut at the next meeting in February.

– US Durable Goods: New orders of key US-manufactured goods could fall again. This suggests some moderation in business spending as the non-defence capital goods figure excluding aircraft is a closely watched proxy for investment plans.