Daily Market Analysis from ForexMart

The Fed remains cautious despite expectations of a rate cut

The head of the Federal Reserve System, Jerome Powell, in his recent comments stressed that the strong US economy gives the central bank the opportunity to be cautious about changes in interest rates. According to Powell, the economy is in good condition, and there is no reason to expect changes in this direction.

At the same time, despite the reduction in interest rates by the Fed, the cost of borrowing for citizens has not changed significantly. This is because rates on most loans, such as mortgages and credit cards, depend on the yield of 10-year U.S. bonds, which have recently reached high levels despite efforts to reduce inflation.

Powell noted that the current economic situation leaves many uncertainties, including in light of possible changes in the trade policy of the new administration of President Donald Trump. He also expressed hope for constructive relations with the new Government.

The issue of the Fed's independence also remains relevant. Some of Trump's economic advisers have suggested giving the president more influence over the regulator's decisions, although many experts emphasize the importance of the central bank's independence for the stability of the economy and the US dollar.
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EUR/USD Weekly Preview: CPI, PPI, ECB

In two weeks, the currency market will de facto go on a Christmas/New Year vacation, which will not end until early January. But before leaving, traders will "slam the door loudly," reacting to the key events of December.

The upcoming week is packed with significant events for the EUR/USD pair. Key November inflation data will be released in the US, and the European Central Bank will hold its final meeting of the year in Frankfurt.

Monday-Tuesday
On Monday, traders will focus on China's November inflation report. With an otherwise empty economic calendar, this release could significantly influence USD pairs, but only if the results deviate from forecasts.

In October, China's Consumer Price Index (CPI) fell to 0.3% (forecast: 0.4%). The indicator shows a downward trend for the second month, reflecting weakening consumer demand. November's CPI is expected to rebound to 0.4%. If inflation unexpectedly slows further, the USD might gain indirect support due to heightened risk-off sentiment.

Wholesale inventory data will be published later during the US session, though it's a secondary macroeconomic indicator unlikely to significantly impact EUR/USD.

On Tuesday, the US will release the labor cost index, measuring the annual change in employer expenses per employee (this considers not only salary deductions but also taxes and payments to other funds). This lagging indicator could influence the USD only if it diverges significantly from expectations. The index is forecasted to decrease to 1.3% in Q3, following drops to 1.9% in Q2 and 2.4% in Q1.

Wednesday
Wednesday brings the week's most crucial macroeconomic report: the November US Consumer Price Index (CPI). Given recent Federal Reserve statements, this report could determine the outcome of the Fed's January meeting and possibly the December one.

For instance, Fed Governor Christopher Waller has indicated support for pausing the easing cycle if the data contradict forecasts of slowing inflation—that is, if the CPI and PPI accelerate again. At the same time, Waller spoke about the pause not hypothetically but in the context of the December meeting.

Similarly, San Francisco Fed President Mary Daly suggested that rate hikes might resume if inflation accelerates. For the most part, the rest of the members of the U.S. central bank called for a slowdown in the pace of policy easing but did not rule out "other scenarios." Among them is Jerome Powell, who has also recently toughened his rhetoric.

In other words, the CPI is significant in current circumstances.

According to forecasts, Headline CPI is expected to rise to 2.7% YoY (up from 2.6% in October). If realized, it could signal a reversal in the six-month downward trend seen through September. In October, the Headline CPI unexpectedly increased, and if it comes out at least at the forecast level (not to mention the "green zone") in November, then we can already talk about a certain trend, which will not please the Fed representatives.

The Core CPI is expected to remain at 3.3% YoY. The indicator was at the same level in October and September. The stagnation of the core CPI adds to Fed concerns amid rising overall inflation.

Thursday
Thursday is another critical day for EUR/USD, with the ECB's final meeting of the year taking center stage during the European session. The base-case scenario suggests a 25-basis-point rate cut. Additionally, the ECB will release its quarterly projections on rates and macroeconomic indicators. After the latest data on the growth of the European economy and inflation in the eurozone, the 50-point scenario is not even hypothetically considered. Therefore, reducing the rate by 25 points will not substantially impact the euro and, consequently, on EUR/USD. Traders are interested in further prospects for easing the monetary policy. Therefore, the market's main attention will be focused on the main points of the accompanying statement and the rhetoric of Christine Lagarde.

Recent Eurozone data shows that Q3 GDP growth reached 0.4% QoQ (forecast: 0.2%), the strongest growth rate since the beginning of the year before last. On an annual basis, GDP increased by 0.9% (forecast: 0.8%), the strongest growth rate since the first quarter of 2023.

As for inflation, Headline CPI rose to 2.0% (forecast: 1.9%), and the core remained at the previous month's level, 2.7%, with a forecast of a decrease of 2.6%. Inflation of service prices (one of the report's most important components, which is closely monitored by the ECB) remained at a high level—3.9%.

These figures suggest that the ECB will continue easing monetary policy moderately. During the post-meeting statement, Lagarde is expected to emphasize a data-dependent approach.

The Producer Price Index (PPI) will be released in the US session, another vital inflation indicator alongside CPI. The Producer Price Index (PPI) will be released in the US session, another vital inflation indicator alongside CPI. Forecasts suggest that the headline PPI is expected to accelerate to 2.5% YoY, while the core PPI is expected to rise to 3.2% YoY. A stronger PPI print could support the USD, especially if CPI also meets or exceeds forecasts (not to mention the "green zone").

Friday
Eurozone industrial production data will be published on Friday. In monthly terms, the indicator should show positive dynamics, but it will remain in the negative area (-0.1% in October against -2.0% in September). In annual terms, the indicator should fall to -3.0% after falling to -2.8%.

The Import Prices Index will be released in the US session. Though secondary, it provides additional context for inflation trends. Forecasts indicate a rise to 1.0% YoY in November (up from 0.8% in October and -0.1% in September).

Conclusions
The spotlight will be on US inflation reports (CPI and PPI) and the ECB meeting. Accelerating US inflation would boost USD demand since, in this case, traders will "remember everything": Mary Daly's hawkish statements, strong Nonfarms, and pro-inflationary policies under the incoming Trump administration.

Meanwhile, the ECB's dovish tone amid rising Eurozone inflation could weigh on the euro.

Short positions on EUR/USD become relevant if the pair breaks below the 1.0530 support level (the middle Bollinger Band and Tenkan-sen line on D1). The first target is 1.0470 (the lower line of Bollinger Bands, coinciding with the lower border of the Kumo cloud on H4), and the second target is 1.0420 (the lower line of Bollinger Bands on D1).
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The main events by the morning: December 17

The European Union has imposed the 15th package of sanctions against Russia. The construction giant PIK and the airline UTair, as well as the head of Avtodor Vyacheslav Petushenko, were subject to restrictions. The sanctions affected 52 tankers carrying Russian oil, top managers of fuel and energy sector companies and heads of Gazprom subsidiaries: Gazprom Fleet, Gazstroyprom and Gazprom LNG Technologies.

The Moscow Stock Exchange index fell to a one-year low, reaching 2,395 points. The market is reacting negatively to the speeches of the president and the Minister of Defense, new sanctions and the expectation of a decision on the key rate. Rostelecom's shares have fallen to the lowest value since 2022 – 50 rubles. The collapse of MTS Bank continues, whose securities have lost 60% since the IPO. The largest drop was demonstrated by «Samolet» – since the beginning of the year, the company's shares have depreciated by 79%, falling from 3,851 to 845 rubles per paper.

Donald Trump has announced plans to impose or increase tariffs against a number of countries. At a press conference at the Mar-a-Lago estate, the president-elect stressed that the United States will be guided by the principle of reciprocity: if a trading partner imposes duties on American goods, the United States will impose similar measures in response. The list of countries potentially subject to new duties may include Brazil, India and China.

US Senator Bernie Sanders criticized the US defense budget, which reached almost $900 billion. According to him, inflated defense spending limits funding for health and social care programs. Sanders also spoke about large-scale fraudulent schemes at the Pentagon, where defense companies overestimate the value of contracts by 40%.

South Korea has imposed sanctions against 7 individuals and 13 organizations from Russia. The reason was the accusation of illegal military cooperation with the DPRK. In total, 11 people and 15 organizations were included in the list, including two generals of the Korean People's Army, a rocket engineer and one officer.
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The main events by the morning: December 18

Gazprom's shares have collapsed to their lowest level since 2009. Gazprom's securities continued to fall for the fourth day in a row, reaching 107 rubles per share. This is a record low for the last 14 years. The main reason was the EU's rejection of interest in the transit of Russian gas through Ukraine and the transition to alternative energy sources, which caused a negative reaction from European gas companies.

Elon Musk is under the gun of the US authorities. SpaceX and its founder Elon Musk have been under scrutiny by the American authorities. According to The New York Times, Musk is suspected of possible violations related to the secrecy of state secrets.

Silver will be the main asset of 2025. Experts at Heraeus Precious Metals predict an increase in the value of silver on the global market in the range of $28 to $40 per troy ounce in 2025. Silver is expected to rise in price faster than gold, which makes it a promising investment asset.

The cost of bitcoin has updated another historical high, exceeding $ 108 thousand. Crypto investors continue to buy, expecting that the newly elected US President Donald Trump will create more favorable conditions for the crypto industry and include bitcoin in the US strategic reserve.

South Korean President Yoon Suk Yeol ignores the investigation. He did not appear for questioning at the Office of Anti-Corruption Investigations in the case of the rebellion. Yeltsin's powers were suspended as a result of impeachment in parliament.
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EUR/USD: Powell arranges sell-off. EUR plunges to 2-year low. Parity on horizon?

The EUR/USD pair plunged to 1.0351 with a single-session fall of 1.32%. The instrument recorded its lowest close in two years. This slump was triggered by unexpectedly hawkish statements from the Federal Reserve, which made it clear that no rate cuts are anticipated in January.

According to the updated FOMC forecasts, only two rate cuts are expected in 2025, significantly fewer than previous estimates. This adjustment in expectations led investors to reassess their positions. As a result, this entailed a sharp drop in stock indices, a rise in US Treasury yields, and, consequently, a strengthening of the dollar.

Despite being just six days before Christmas, markets faced another unpleasant surprise. Under the influence of the Fed's hawkish statement, the S&P 500 index tumbled by 2.95%, marking its steepest post-meeting decline since 2001.

The reaction also extended to the debt market. Higher yields on US Treasuries compared to other countries provide investors with an additional incentive to invest in the US. The yield on benchmark 10-year Treasury bills jumped by 11.5 basis points, surpassing 4.5% for the first time since May. In comparison, the yield on 10-year German bonds is only about 2.29%.

According to strategists, the Fed's intention to moderate the pace of rate cuts is bearish for the US dollar due to the widening short-term interest rate differentials with the eurozone.

Analysts are closely monitoring changes in the FOMC's dot plots, which reflect individual committee members' expectations for future interest rates. The latest snapshot indicates a cumulative rate cut of 50 basis points in 2025 (two steps of 25 bps each), twice lower than the 100 bps forecasted in September and below the 75 bps expected by market consensus before the update was released.

The revised forecasts reinforced the outlook for a higher funds rate, with the long-term median dot now projected at 3.0%. This suggests that the current rate-cutting cycle will end at a higher level than previously anticipated.

At the same time, economic forecasts were revised upwards: the annual inflation rate for 2025 is now expected at 2.5%, up from the earlier estimated 2.1% increase. Most FOMC members believe core inflation will continue to decline in 2025.

Jerome Powell noted that the latest rate cut was a difficult decision and confirmed the Fed's intention to slow the pace of monetary policy easing. He emphasized that before any further rate cuts, the central bank expects clearer progress in reducing inflationary pressures and will not tolerate inflation persistently above the 2% target.

As a result, markets are revising their expectations, preparing for a prolonged pause in the Fed's easing cycle. This scenario could keep the US dollar elevated through 2025, further pressuring the euro. Could parity be on the horizon?

Temporary rebound in EUR/USD

During Thursday's European session, the EUR/USD pair managed to climb back above the 1.0400 level, as the bullish momentum of the US dollar slightly weakened following Wednesday's sharp rally.

However, fundamental signals still do not provide a basis for a shift in the overall negative trend. Both short-term and long-term exponential moving averages (EMAs) reveal the bearish trend.

The 14-day Relative Strength Index (RSI) broke below the lower border of the bearish range at 20.00 to 40.00, signaling the formation of a new downtrend.

From a technical viewpoint, the key support level for the EUR/USD pair could be 1.0200, provided it breaks below the two-year low at 1.0330.

In the case of an upward correction, the nearest significant obstacle for bulls would be around the 1.0500 zone, where the 20-day EMA is recognized.
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The main events by the morning: December 20

There is a new crisis in the United States: the government is on the verge of a shutdown due to the failure of the funding bill. Republicans proposed a document that was supported by only 174 members of the House of Representatives, while 235 opposed it. If the bill had been approved, the federal government would have received funds to work until March 2025, and the debt ceiling would have been suspended until January 2027.

The International Monetary Fund believes that the Russian economy is growing due to the rapid growth of wages. The Director of Communications of the foundation noted that the growth of the Russian economy is due to strong private consumption, supported by a tough labor market and rapid wage growth. Corporate investments also play an important role.

Sanctions against Russia have led to an increase in business tourism. Already, almost 20% of business trips are to foreign destinations, the leaders among which are China and the UAE. Next year, the number of business trips may increase by another 15-20%. This is due to the desire of businesses to explore new areas for doing business within the Russian Federation or in friendly countries.

Donald Trump has threatened the EU countries that they must fill the trade deficit with the United States through purchases of oil and gas. Otherwise, the United States will impose widespread tariffs.

Bitcoin fell below $95,000 after the decision of the US Federal Reserve System to put the key rate cut on pause. The Fed also raised its inflation forecast for next year. Experts believe that the head of the regulator, Jerome Powell, may become a new villain for the crypto industry, replacing the head of the SEC, Gensler.

Thailand is considering the possibility of legalizing bitcoin as a means of payment. The country's finance minister proposed starting an experiment in tourist regions such as Phuket and Hua Hin, where it would be possible to allow the use of cryptocurrency in restaurants, cafes and shops. This will simplify the lives of tourists who will be able to pay with digital assets without having to look for currency exchange offices.
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