This week has witnessed two consecutive days of pivotal events shaping the global financial landscape. Yesterday, the Federal Reserve signalled a change in course, leaving interest rates unchanged but hinting at future cuts. Today, the spotlight shifts to the Bank of England and the European Central Bank, both expected to hold rates steady but facing distinct economic pressures.

The Fed Holds Rates, Hints at Future Cuts and USD Tumbles

The Federal Reserve concluded its final meeting of the year by leaving its benchmark interest rate unchanged at 5.25%-5.5%, as widely anticipated. However, the accompanying statement, Dot Plot, and Fed Chair Jerome Powell's press conference sent a clear signal: future rate cuts are on the horizon.

Powell acknowledged that policymakers are actively discussing the timing of rate cuts, noting their focus on avoiding prolonged high interest rates. This dovish stance triggered a sharp decline in US Treasury yields, with the benchmark 10-year yield dropping below the psychologically important 4% level. Consequently, the US Dollar Index, which measures the greenback's strength against a basket of major currencies, fell by 0.35% on Thursday.

BoE Decision Looms, Investors Brace for a Pushback against Rate Cuts

Across the Atlantic, the Bank of England is set to announce its interest rate decision later today. While markets anticipate a hold at the current 5.25% level, the central bank's language and forward guidance will be closely scrutinized for clues about future policy moves.

Despite market pricing suggesting a 10% chance of a rate cut as early as March 2024, rising to 90% by June, several factors suggest the BoE may push back against these dovish expectations. Recent comments by BoE policymakers have maintained a hawkish tone, highlighting concerns about persistent inflation and the potential for a wage-price spiral.

UK Data Paints a Mixed Picture: Slowing Wages, High Inflation, Contracting Economy

Economic data released this week painted a mixed picture of the UK economy. Wage growth slowed to 7.3% in the quarter to October, falling below expectations and suggesting some easing of inflationary pressures. However, services inflation remains stubbornly high at 6.6%, highlighting continued concerns about price increases.

Further dampening the mood was the news that the UK economy shrinking was by 0.3% in October. While economists believe this data point is unlikely to sway the BoE's near-term policy stance, it raises concerns about the potential for a recession in the coming months.

ECB Expected to Hold Rates, Focus Shifts to Softer Inflation and Weak Growth

Shifting to the Eurozone, the European Central Bank is also widely expected to hold its key interest rates steady at 4.50%. This decision comes amid encouraging signs of softening inflation, with the November Harmonized Index of Consumer Prices (HICP) dropping by 0.5% and the annual rate falling to its lowest level since July 2021.

However, economic activity remains a concern. The Eurozone’s GDP stagnated during the third quarter, and recent reports point to no significant improvement in the current quarter. Industrial production also declined by 0.7% in October, further highlighting the region's economic challenges.

Against this backdrop, ECB President Christine Lagarde is expected to use her press conference to push back against market expectations of rate cuts in the coming year. While acknowledging the recent easing in inflation, she is likely to emphasize the need for continued vigilance and the potential for external risks, such as the war in Ukraine, to impact the economic outlook.

EUR/USD Rides the Wave of a Weak USD, Eyes Resistance Levels

The EUR/USD pair has benefited from the US Dollar's weakness, breaking above the 1.0900 mark and shifting the short-term bias towards bullishness. Key resistance levels lie ahead at 1.0975 and the psychological 1.1000 mark. The weak USD provides crucial support for further upside potential in the EUR/USD pair.