Week of DECEMBER 22

A busy week wrapping up ahead of the holidays saw policy meetings from the ECB, BOE and BOJ, as well as key jobs and inflation figures from the US. The value rotation persisted in the week ahead of the holiday season as higher yields weighed on equities, and substantial weakness was noted in the yen amid speculation that carry trading might be resumed. Progress in reaching a deal on Ukraine brought geopolitics to the forefront, causing Brent to fall to its lowest level since early 2021.

The week ahead is shortened by the Christmas holiday on Thursday, with minor data being released on Tuesday, the last before markets go into year-end trading mode.

The Week in Review

Central bank decisions were the main theme of the week, with markets in a bit of a holding pattern on Monday and Tuesday. Equities underperformed during the week amid signs of a rotation towards a defensive posture ahead of the extended weekend, with all major indices declining through the week. The Nasdaq underperformed but managed to maintain the 25k as support, despite solid results from Micron Technologies helping renew confidence in the AI-backed tech sector. Also influencing markets was the shift away from battery electric vehicles (BEVs), with the EU postponing a plan to ban production of internal combustion engines in Europe, and Ford taking a nearly $20 billion write-down amid a shift away from electric F-150 Lightning production.

The ECB kept rates unchanged, as was widely expected, and reiterated its stance that policy is in a good place. However, its economic outlook showed a slightly hotter economy, which could leave the shared central bank towards a more hawkish inclination. The EURUSD hardly reacted to the decision but ended lower for the week, leaving behind a shooting star pattern on the weekly after receiving rejection at 1.1800.

The BOJ started the week by announcing its long-anticipated plan to sell ETFs, a wind-down of its assets that is expected to take decades. Then on Friday, it raised rates by a quarter point, as was widely anticipated. The initial strength in the yen faded quickly as traders saw a very slow hiking path for the BOJ in the future. The prospect that the BOJ might hold for months left the yen weaker amid speculation that carry trading could resume. EURJPY soared to new record highs above 184.00.

As expected, the BOE cut rates by a narrow margin, 5-4. Several officials called for caution going forward, given the inflation risk. The overall tone of concern over consumer prices left the market with the impression that it was a "hawkish cut". The pound and UK equities reacted positively, with lower rates supporting the FTSE 100, while the cautious hawkish outlook aided gains in the pound. The GBPUSD pair closed the week mixed, however.

The US released the first batch of post-shutdown data this week, providing a mixed bag and some nuance. NFP was above expectations, and the unemployment rate rose to 4.6% from 4.4%, as was expected. This is seen as justifying further easing from the Fed. But economists cautioned that the data may be incomplete, as the BLS only started to work on the 14th. A similar story was seen with an unexpected drop in the CPI to 2.7% compared to expectations of 3.1%. Economists pointed to the low rate of growth in the shelter component, suggesting that the unexpectedly lower inflation rate might be due to a technical impact from the shutdown. Markets are now looking forward to the December data, which will be published before the next FOMC meeting

In geopolitics, dual pressure was applied to crude as talks to end the war in Ukraine seemed to show progress, while the White House ramped up pressure on Venezuela. Both Ukraine and Russia expressed optimism at reaching a deal after Ukrainian and US officials met in Miami, with Russian officials expected to meet in the same city over the weekend. Meanwhile, the US instituted a military blockade of exports of sanctioned oil from Venezuela (Chevron's exports are not subject to sanctions), and the EU renewed sanctions against the country.

Biggest Market Movers

• The FTSE 100 ended the week higher after the BOE cut rates, as was widely expected.
• The dollar generally strengthened through the week amid higher yields after CPI figures and a general move to safety ahead of the holiday period.
• The Kiwi dollar was the underperformer among major currencies after RBNZ Governor Anna Breman warned that the economy faced challenges.
• The USDJPY rose in the wake of the BOJ decision, with the yen weakening as traders saw it as unlikely that rates would increase again soon.
• Crude crashed to lows not seen in almost 5 years amid hopes that the war in Ukraine would end soon, which could bring Russian crude back on the market.

Top Events in the Week Ahead

The coming week is expected to be relatively quiet, with most markets closed for Christmas starting on Thursday. As traders wait to see if there will be a Santa Rally, some data releases could motivate the market. On the geopolitical front, the focus will be on the high-level meeting between US and Russian officials aimed at reaching a deal on Ukraine over the weekend.

US Economy Slowing a Bit

Tuesday sees the last major data release before the holiday season, with the focus likely on the delayed publication of preliminary US Q3 GDP figures. The US economy is expected to have grown at a 3.2% annual rate, below the 3.8% recorded in the second quarter amid the rebound from the tariff shock of April. At the same time is the release of the US October durable goods, which are projected to fall back into negative at -0.3% compared to 0.5% in September. Both figures are likely to depict a resilient, albeit slowing, US economy. In that line of thinking, gold could finally break to new record highs after consolidating below the October peak of $4,385 per ounce, with support sitting at $4,245.

Other Events and Earnings

Tuesday includes the publication of the RBA minutes. Wednesday has BOJ minutes. No major earnings are expected during the week.