The Federal Reserve hinted at a pivot, the European Central Bank is still on hold. Bets that central banks will cut rates in the upcoming months are way too optimistic. EUR/USD aiming to extend gains in the first half of 2024 amid sentiment trading. If 2023 could be described with one word, that would be "sentiment". Through the last four years, the world has become a different one, and so have investors' mindsets. As this year ends, some vestiges of normality are peeping in the near future, although the road is still long. Let's take a brief look into the past. The pandemic from 2020 interrupted global economic activity amid widespread lockdowns. The world woke up from the lethargy in 2021 and attempted to return to normal, failing miserably on the matter. Governments assumed debts that are still due, and central banks were caught off guard. Why? Because the decision to stall all activity forced governments to come to the rescue with financial support for businesses and households alike. Easy money and the end of lockdowns resulted in skyrocketing price pressures, with inflation in most developed economies hitting multi-decade peaks in mid-2022. As a result, global central banks engaged in massive rate hikes tied to increased recessionary risk. The United States (US) Federal Reserve (Fed) led the way, but apart from the Bank of Japan (BoJ), all major central banks followed. Indeed, inflation receded in the second half of 2022, with market hopes undermining demand for the safe-haven US Dollar.  The EUR/USD pair ended 2022 at around 1.0700 after bottoming at 0.9535 a few months before. 2023 Recap: The year of hope As the Federal Reserve also took the lead on slowing the pace of rate hikes, financial markets turned optimistic and timidly considered a potential shift in monetary policy. Anyway, policymakers at both shores of the Atlantic pledged at the end of 2022 to additional rate hikes and kept their word. The Fed pulled the trigger seven times through 2022, lifting the benchmark rate from 0.00%-0.25% to 4.25%-4.50%. It added then four more 25 basis points hikes through 2023, bringing rates to 5.25%-5.50% in July. Across the pond, the European Central Bank (ECB) delivered four hikes on the Main Refinancing Rate, lifting it from 0.0% to 2.50% in 2022. The ECB continued with six more hikes in 2023, bringing it to 4.50% in September.  It's clear that the ECB took a more conservative approach to monetary tightening, and there are good reasons beyond it. The imbalances between the different economies that are part of the European Union (EU) merit delicate movements, as the common monetary policy needs to fit flourishing economies with those perpetually battling with deficits and poverty. As the year went by and rates continued to rise, market participants began wondering whether central banks could tame inflation while dodging economic setbacks. Concerns about widespread recessions pushed investors back into the safe-haven US Dollar. Central bankers fueled growth-related preoccupations as Fed Chairman Jerome Powell and ECB President Christine Lagarde converged to put controlling inflation above economic growth. Still, and as inflationary levels continued to recede, hopes increased. By the end of the first quarter of 2023, market players began talking about rate cuts. As price pressures eased further, bets increased despite policymakers' warnings against them. By mid-2023, central bankers made modest tweaks to their rhetorics. Inflation remained the main concern, but instead of insisting on continued hikes, they introduced the "higher for longer" concept, keeping rates at restrictive levels sufficiently enough to grant stable and on-target inflation. Policymakers could stir the pot throughout the year, and December went by without the so-longed rate cuts. However, it has become clear loosening the monetary policy is the next step. The shift to a more conservative approach came by the hand of fear. Inflation continued to ease, but growth remained on the back foot. According to the latest available data, Q3 seasonally adjusted Gross Domestic Product (GDP) decreased by 0.1% in the Euro Area and remained stable in the EU, compared with the previous quarter, according to a flash estimate published by Eurostat. In the second quarter of 2023, GDP grew by 0.2% in the Euro Area and remained stable in the EU. Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 0.1% both in the Euro Area and in the EU in the third quarter of 2023, after +0.5% in the Euro Area and +0.4% in the EU in the previous quarter.   In the US, Real GDP increased at an annual rate of 4.9% in the third quarter of 2023, according to the  Bureau of Economic Analysis (BEA). In the second quarter, real GDP increased 2.1%. The increase in the third quarter primarily reflected increases in consumer spending and inventory investment.   Bottom line, this...

Quiet week ahead as FX markets enter holiday season. Spotlight will fall mostly on some Japanese releases. Most importantly, liquidity will be in short supply. Yen awaits Bank of Japan signals Another devastating year for the Japanese currency is coming to an end. Despite mounting a comeback in recent months, the yen is still on track to close the year with losses of around 8% against the US dollar, mostly because of the Bank of Japan's refusal to raise interest rates. Indeed, the latest recovery in the yen has been driven mostly by speculation that foreign central banks in the United States and Europe will slash interest rates aggressively next year. Hence, currencies like the dollar and the euro have lost some of their interest rate advantage over the yen. Despite a streak of high inflation readings, the Bank of Japan is still reluctant to raise rates because it is not yet confident that this inflation impulse will be sustained. For that to happen, BoJ officials need to see an acceleration in wage growth. This puts extra emphasis on the spring wage negotiations between big businesses and big labor unions. Markets currently assign an 80% probability for the BoJ to exit negative interest rates in April, which is when the wage negotiations will conclude. Next week's events will help shape this pricing, and drive the yen accordingly. The show will get started on Monday with a speech by BoJ Governor Ueda. Then on Tuesday, the nation's employment data for November will hit the markets. But the main event will probably be on Wednesday, when the summary of opinions from the latest BoJ meeting is released. This was the meeting when the BoJ kept policy unchanged and pushed back against the notion that it will begin tightening soon. Governor Ueda stressed that they won't rush into anything and will take a measured approach overall, crushing the hopes of yen bulls. Investors will be hoping to get some more clarity from the summary of opinions. Specifically, was this view shared by all BoJ officials, or are some of them leaning in the direction of tightening policy next year? Speaking of next year, the stage appears set for the yen to perform better. The world economy is losing momentum and markets anticipate a global rate-cutting cycle to begin in the spring, right as the Bank of Japan might finally raise its own rates. Hence, interest rate differentials are set to compress in the yen's favor, which could provide some relief to the bruised currency. Mind the liquidity risk Beyond any movements in the yen, the main story next week might be a shortage of liquidity. With many traders away from their desks and several investment managers having closed their books for the year, liquidity will be in short supply. When liquidity is low, financial markets can move sharply without any real news. And if there are news headlines, their market impact could be greater than usual. In other words, low liquidity conditions can amplify volatility, especially if there is a news catalyst. Monday will be a public holiday in much of the world, so most stock and bond markets will remain closed. As always though, the FX market will be open for business. On the data front, there are some second-tier releases in the United States, including regional Fed surveys from Dallas and Richmond on Tuesday and Wednesday, respectively. For a complete guide into how the major currencies could perform in 2024, please check out our FX Year Ahead report here. Happy holidays!

EUR/USD went into a consolidation phase near 1.1000 early Friday. US PCE inflation data could drive the USD valuation in the American session. Thin trading conditions ahead of Christmas holiday could limit the pair's action. EUR/USD gathered bullish momentum and climbed above 1.1000 on Thursday as the US Dollar came under bearish pressure following the mixed data releases. The pair holds steady at around 1.1000 early Friday ahead of the Personal Consumption Expenditures (PCE) Price Index data from the US.  The US Bureau of Economic Analysis (BEA) announced on Thursday that it revised the annualized third-quarter Gross Domestic Product (GDP) growth lower to 4.9% from 5.2%. The GDP Price Index in the same period was also lowered to 3.3% from 3.5%, showing that inflation had a smaller effect on the GDP growth than initially estimated.  Although other data from the US revealed that there were 205,000 Initial Jobless Claims in the week ending December 16, compared to the market expectation of 215,000, the USD weakened against its rivals in the American session.

After a day in negative territory, markets have regained holiday cheer, with all three major U.S. indices staging a rally on Thursday. The S&P 500 recorded a 1% gain, with market participants buying up dips in the Tech sector. The immediate cause seems relatively straightforward, with yesterday's sell-off appearing more about a cohort of speculative algorithmic machines running for cover than any macroeconomic concerns, all the while the Fed rate cut beat goes on. Key highlights included a substantial 8.6% surge in shares of memory-chip maker Micron, driven by the company's issuance of more optimistic guidance for the current quarter than initially expected. Additionally, with U.S. yields experiencing a decline, the stage was set for yet another round of dip buying, resulting in a "Magnificent 7 rally." If recent trends hold, stocks are poised for an upward trajectory in the typical "Santa Claus Rally." However, given the substantial gains that have already transpired, investors may find themselves content with the early Santa stocking stuffer rather than risk the proverbial lump of coal if the US PCE data comes in hotter than expected.

Almost one year ago, we labeled 2023 as 'a year of transition to what?' based on the view that inflation would decline, that official interest rates would reach their peak and a concern that the disinflation process could be bumpy. 2023 has brought us many surprises: the resilience of the labour market in the US and the Eurozone, the extent of monetary tightening, the risk appetite of investors. The biggest surprise was the growth performance of the US economy. Towards the end of the year, the changing message from the Federal Reserve -and to a lesser degree of certain ECB governing council members- with respect to the monetary policy outlook has brought us a another favourable surprise and a hopeful note for 2024. As the year draws to a close, the time has come to look back and ahead. We will do the latter in our first issue of 2024 and focus in this editorial on 2023. Almost one year ago, we labeled 2023 as 'a year of transition to what?'. The word transition referred to our belief that inflation would decline and that official interest rates would reach their peak. Subdued growth -we expected that the US and the Eurozone would spend part of the year in recession-, would pave the way for more disinflation, gradual rate cuts and a soft recovery in 2024. The reference to 'transition to what?' expressed the view that the journey could be bumpy due to a new, significant and lasting increase in the price of gas, a slower than expected decline in inflation or an impact of past rate hikes that would be bigger than anticipated. Comparing forecasts with reality can be a sobering exercise and for some variables this was clearly the case in 2023, as illustrated in table 1. The column 'December 2022' refers to projections for 2023 published in December 2022. The column 'December 2023' refers to the estimates for 2023 published this month. For growth and inflation, the data show annual averages except for the Federal Reserve's Summary of Economic Projections, which show percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. Interest rate forecasts are for the end of the calendar year. Download the Full Report!

Gold price touches a three-week high on Friday amid rising bets for a March Fed rate cut. A modest USD uptick caps gains for the XAU/USD ahead of the crucial US PCE Price Index. The fundamental backdrop favours bullish traders and supports prospects for further gains. Gold price (XAU/USD) rises to a near three-week high, around the $2,055 region earlier this Friday, albeit struggles to capitalize on the move amid a modest US Dollar (USD) uptick. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, reverses a part of the previous day's slide to a near five-month trough touched in the aftermath of a downward revision of the US GDP print. The third and final reading from the US Bureau of Economic Analysis showed that the world's largest economy expanded by a 4.9% annualized pace vs. a 5.2% rise in the second estimate. The markets were quick to price in a greater chance that the Federal Reserve (Fed) will start cutting rates as early as March 2024 and 155 basis points (bps) of easing by the end of next year. Traders, however, seem reluctant to place aggressive USD bearish bets and prefer to wait for the release of the US Core Personal Consumption Expenditure (PCE) Price Index, due later during the early North American session. The headline index is expected to inch down to a 2.8% YoY rate in November, from the 3% previous. Meanwhile, the core figure, which excludes volatile food and energy prices and is considered as the Fed's preferred inflation gauge, is anticipated to fall to 3.3% YoY from 3.5% in October. Given market expectations for more rapid interest rate cuts by the Fed in 2024, the immediate market reaction to softer readings is more likely to be minimal. In contrast, a stronger report might prompt some USD short-covering move and weigh on the USD-denominated Gold price. Any meaningful downside for the precious metal, however, seems limited amid the prospects of a global rate-cutting cycle. This, in turn, suggests that the path of least resistance for the non-yielding yellow metal is to the upside and a corrective decline might still be seen as a buying opportunity. Nevertheless, the Gold price remains on track to register modest gains for the second week in a row. Technical Outlook From a technical perspective, a move beyond the $2,047-2,048 hurdle, representing the top end of over a one-week-old trading range, favours bullish traders. Adding to this, the occurrence of a golden cross, with the 50-day Simple Moving Average (SMA) crossing the 200-day SMA from below, supports prospects for additional gains. The constructive outlook is reinforced by the fact that oscillators on the daily chart are holding in the positive territory. Hence, some follow-through move towards testing the next relevant hurdle, around the $2,072-2,073 region, looks like a distinct possibility, above which the Gold price could aim to reclaim the $2,100 round figure. On the flip side, any meaningful corrective pullback could find decent support and attract fresh buyers near the $2,028-2,027 area. This should help limit the downside for the XAU/USD near the $2,017 horizontal zone. That said, a convincing break below the latter might prompt some technical selling and make the Gold price vulnerable to accelerate the slide towards the $2,000 psychological mark. This is closely followed by the 50-day SMA, currently around the $1,994 area, below which the downward trajectory could get extended further towards last week's swing low, around the $1,973 region, en route to a technically significant 200-day SMA, near the $1,958 zone.