Last week, published CPI and PPI data highlighted persistent inflation levels above the FOMC’s target. While overall inflation has trended sideways, the PPI data suggests further challenges ahead. This is unlikely to prevent a 25 bps Fed rate cut next week but may lead to revised guidance for additional easing, along with a shift in the tone of the accompanying statement and projections.

Foreign central banks were notably active: the ECB cut rates by 25 bps, signaling steady easing through mid-2024. The SNB and BoC took more aggressive actions, implementing 50 bps cuts. Conversely, Brazil’s central bank surprised markets with a 100 bps hike, exceeding the anticipated 75 bps increase and signaling further large hikes ahead.

While the “Santa rally” continues to influence markets, attention will shift to the Fed’s decision next week, which will likely shape USD dynamics and result in mixed FX trading conditions. On Wall Street, stock markets may exhibit caution, especially if the Fed hesitates on further rate cuts, with fundamentals likely to dominate sentiment as the holiday lull approaches.

On the calendar, in addition to the Fed meeting, key U.S. data releases include Retail Sales, Industrial Production, and Personal Income and Spending. Outside the U.S., Eurozone PMIs, along with policy rate decisions from the BoJ and BoE, will also be critical to watch.

US Outlook and Fed Challenges!

November’s CPI and PPI data highlighted persistent inflationary pressures, with overall inflation rising to a four-month high of 2.7% annually. The monthly CPI, after two consecutive months of 0.2% increases, rose by 0.3% in November. Core inflation remained sticky at 3.3%, reflecting underlying shifts: goods inflation increased due to waning commodity price relief and supply chain stabilization, with a fourth consecutive monthly rise of 0.3%. In the week ahead, personal income and spending data will provide further insights into the trajectory of U.S. inflation.

Additionally, the NFIB Small Business Optimism Index surged in November, with post-election confidence boosting market sentiment and sales expectations. However, actual earnings and hiring showed only modest gains, while credit conditions remained challenging, with short-term loan rates averaging 8.8%. Given the lingering uncertainty surrounding potential trade tariffs, immigration, tax, and regulatory policies in the coming year, a cautious outlook for the midterm is warranted.

In the week ahead, the main market driver, not just in the U.S. but globally, is the FOMC monetary policy meeting and interest rate decision. The Federal Reserve is expected to cut rates by 25 bps next Wednesday and signal a pause in further cuts. Market attention will focus on forward guidance, Powell’s press conference, members’ economic projections, and the dot plot. We anticipate a hawkish tone in the statement and increased hesitation to pursue further cuts, which could support the USD and potentially slow down the Santa Rally.

On the economic data front, upcoming releases, including retail sales, industrial production, and November’s PCE inflation rates, will shape market sentiment. October retail sales showed strong momentum, with upward revisions for September. Holiday sales are forecast to grow 3.3% year-over-year, though this remains below the long-term average of 5%. November sales are projected to rise by 0.5%, continuing October’s gains. On Friday, personal income and spending data will also be in focus. Consumer demand remains robust, supported by a 0.6% income gain in October, driven by wage growth, particularly in the services sector. November forecasts predict a 0.4% income increase and a 0.5% rise in spending. Inflationary pressures persist, with the services PCE deflator up 3.9% annually in October.

Considering market data and Fed expectations, the USD is supported by Trump’s tariff rhetoric, expectations of a slower Fed rate-cutting path, and the resilience of the U.S. economy amid inflationary pressures. These factors collectively favor a stronger greenback. Technically, DXY movements remain bullish above the 106 mark, but with RSI under 60 and flat OBV, the bulls lack strong momentum.

In the stock markets, tech stocks were the primary drivers last week, resulting in gains for Nasdaq and S&P 500, while the Dow Jones lost momentum. Based on expected data and decisions, we believe the overall slight uptrend will persist, albeit with more volatile movements. For the S&P 500, we expect the key pivot line to hold around $5,900, with two important supports at $6,000 and $5,960.

BoE to Delay Any Rate Cuts as Recent Political Changes Can Affect the Markets

With new governments in both the US and the UK, while the political situation in the Eurozone also remains unstable, the trade relationships of the United Kingdom with the US and the EU are key economic factors in the midterm for British stock markets and currency. However, the uncertainty generated by Trump getting into office tends to push the EU and the UK closer together on a trading level.

On a monetary level, we highlight the BoE’s interest rate decision next Thursday. The bank is expected to remain on hold and resume rate cuts in its February meeting. While inflation has shown signs of picking up again in recent months, inflationary risks have increased with the new Labour government’s budget last month, which could be a compelling reason for the central bank to wait longer before making any decisions and to monitor financial markets’ reaction to rapid economic and political changes. Wage growth tells a somewhat similar story, with a gradual and steady decrease since late last year, though still somewhat elevated by historical standards. Therefore, we expect them to opt to hold the policy rate steady at 4.75%. With a cumulative 50 bps of cuts so far in 2024, the BoE has delivered one of the more gradual rate cut cycles among the major central banks that have kicked off monetary policy easing this year.

Besides the BoE meeting, we should note the release of the UK’s employment data on Tuesday, and a possible tighter employment market than expected could provide support for the pound. Yet, the highlight is expected to be the release of the November CPI rates on Wednesday. Should the headline rate continue to accelerate on a year-on-year level, we may see the pound being supported. The last financial data that could stir the pound would be November’s retail sales on Friday, and a possible acceleration of the rate showing growth for the retail sector once again could support the sterling.

Despite the support for the pound based on the BoE’s hawkish expected tone, we still have some doubts about politics and macroeconomic data, especially the latter. Yet for the time being, the absence of adverse fundamentals tends to allow the pound to float. But still, it depends on the BoE’s decisions and Governor Andrew Bailey’s speech after the meeting. Should the bank’s forward guidance set the market’s expectations in doubt by being more hawkish, we may see the pound getting some support, and vice versa.

From a technical point of view, GBP/USD moves in a clear downtrend, with a historical and psychological pivot at 1.25. Breaching under this pivot could open the doors for deeper levels.

Gold

Gold futures prices fell below $2,650 per troy ounce on Friday, following a nearly 1% drop in the previous session. The decline was driven by market reactions to recent U.S. economic data, which fueled a rally in U.S. Treasury bond yields. U.S. manufacturing prices rose more than expected in November, raising concerns that inflation could remain above the Federal Reserve’s 2025 target. Additionally, initial unemployment claims reached a two-month high, suggesting risks to the labor market. However, this was the first time in a while that growth showed strong data, while inflation has remained elevated for the third consecutive month.

Despite these concerns, investors continue to expect the Federal Reserve to lower interest rates by 25 basis points in the upcoming meeting, with additional cuts anticipated in 2025, though their scale remains uncertain. A rate cut by the Fed is typically seen as positive for gold (XAU/USD), as it reduces the opportunity cost of holding the precious metal, which does not yield interest, making gold a more attractive investment for traders.

On the geopolitical front, while the new United States administration is working to ease these conflicts, gold prices have backed off from previous highs. After a sharp rally to start the second week of December 2024, news of Syria overthrowing its government and positive signals about ceasefire talks in Ukraine helped boost sentiment. However, the broader landscape appears much cooler than it was a few quarters ago, preventing gold from breaking past resistance.

From a technical perspective, XAU/USD remains bearish, with strong support around $2,620, followed by $2,600. If breached, we would need to look for support at $2,550. On the flip side, failure to fall below $2,600 could keep the long-term trend bullish.

Oil

Oil prices remain strong, offering a better risk-reward setup than gold. With oil prices around $69 per barrel, there is more upside potential with minimal risk. ETFs like the United States Oil Fund could offer one-to-one returns, but oil stocks higher in the value chain, such as Transocean and Exxon Mobil, present a bigger upside potential.

Oil prices rose more than 2% on Friday, reaching a three-week high due to expectations of tighter supplies from new sanctions on Russia and Iran, along with hopes for lower interest rates in the U.S. and Europe, which could boost fuel demand. This price increase was driven by geopolitical tensions, a potential Federal Reserve rate cut, and stronger-than-expected Chinese crude imports.

The EU and U.S. are imposing additional sanctions on Russia, and there are concerns about Iran’s nuclear activities. Meanwhile, Chinese crude imports increased for the first time in seven months, and the IEA raised its forecast for global oil demand growth in 2025.

Despite weak credit demand in China, oil supply is expected to rise from non-OPEC+ countries next year. Investors are betting on further rate cuts by the U.S. Federal Reserve, which could increase economic growth and oil demand.

On the technical front, WTI still needs to break above $72 to confirm a bullish trend; otherwise, its outlook remains neutral at around $70.

Bitcoin and Investors’ Hopes!

Bitcoin is positioned for a potential year-end breakout as traders monitor critical technical levels and catalysts. Despite recent consolidation, Bitcoin’s price remains bullish, holding just above $101,000. Investors are now eyeing higher levels above $115,000 if BTC can breach its all-time high of around $104,000.

Institutional support and pro-crypto policies, such as BlackRock’s endorsement of increased crypto exposure and pro-crypto regulatory appointments in the new U.S. administration, could bolster confidence once again. Legislative moves to recognize Bitcoin as a reserve currency further enhance its long-term prospects. Additionally, a potential U.S. rate cut this week and dovish policies from global central banks are creating a supportive environment for Bitcoin, drawing liquidity from traditional assets.

However, risks persist. Speculative futures trading, profit-taking by long-term holders, activity from Mt. Gox wallets, and a shift in focus to altcoins could cause volatility.

On the technical front, Bitcoin’s rising channel highlights $94,000 as crucial support, with the next support at $90,000 offering additional safety nets if the price dips. Traders remain optimistic about a sustained rally as long as BTC/USD trades above $94,000.