• USD Strengthened by Global Rate Cuts: The dollar gains as Canada and Europe implement or signal rate cuts, while Japan holds off on hikes and China considers a weaker renminbi, boosting USD/JPY and reinforcing dollar dominance.
• Fed Rate Cut Expected: With no surprises in US CPI data, markets expect the Fed to cut rates by 25bp next week, framing it as an opportunity for less restrictive policy amid stable conditions.
• ECB Set for Dovish Moves: Markets anticipate a 25bp ECB rate cut today, potentially accompanied by lower inflation forecasts, paving the way for accelerated easing and pressuring EUR/USD.
• SNB Decision Could Shake EUR/CHF: The Swiss National Bank is expected to cut rates by 25bp, with a possibility of 50bp. Dovish remarks could momentarily spike EUR/CHF before sellers push it lower.
• GBP/EUR Flat Amid Data Lull: A lack of key UK and Eurozone data left GBP/EUR range-bound, with cautious market sentiment keeping both currencies under pressure ahead of the ECB decision.

USD: Dollar Rides High as Global Rates Fall
The US dollar continues to shine this December, buoyed by rapid rate cuts among trading partners. Canada has executed consecutive 50bp rate reductions, and European central banks could follow suit today. Meanwhile, reports from Japan suggest the Bank of Japan is unlikely to raise rates next week, pushing USD/JPY to the 153 level. A separate report indicating China may allow a softer renminbi also supported the dollar. Although this scenario isn’t our base case, such a shift could ignite competitive devaluations, favoring the dollar’s strength and the relatively insulated US economy.

Domestically, yesterday’s CPI data revealed no surprises, solidifying market expectations of a 25bp Fed rate cut next week. This would reflect a tactical easing while conditions allow. Attention today shifts to Europe, but within the US, the November PPI release could influence next week’s core PCE deflator outcome, potentially offering modest dollar support.

The dollar remains a safe, liquid, and high-yielding option, with one-week deposit rates at 4.55% p.a. If the ECB adopts a dovish stance today, the DXY index could climb toward 107.

ECB: Dovish Signals on the Horizon
Markets widely expect the ECB to announce a 25bp rate cut today, though a 50bp reduction isn’t entirely off the table. Revised growth and inflation forecasts may be key—particularly if the 2025 inflation outlook drops closer to 2.0%, paving the way for faster easing.

Market expectations already price ECB rates moving into accommodative territory (below 2%) by summer. However, if today’s communication from Christine Lagarde fails to convince euro bears, EUR/USD may hover around 1.0550, especially with a major FX option expiry at this level later today.

The Swiss National Bank (SNB) also delivers its decision at 0930CET, with expectations of a 25bp cut to 0.75%. However, a 50bp cut and dovish commentary remain possibilities. SNB President Martin Schlegel could even hint at negative rates and continued FX intervention. EUR/CHF may see short-term volatility but is expected to trend toward 0.90 in 2024.

GBP: Quiet Markets Keep Pound Range-Bound
The GBP/EUR exchange rate traded narrowly on Wednesday due to a lack of significant data from the UK or Eurozone. The Euro remained subdued ahead of today’s expected ECB rate cut, while Sterling faced similar stagnation without clear economic signals.

The cautious market sentiment further pressured GBP, given its heightened sensitivity to risk. Both currencies remain in wait-and-see mode as traders anticipate key developments later this week.