Currency Market Digest: 23rd December 2024

What happened last week?

UK inflation rose to 2.6% year-on-year in November, paving the way for the Bank of England (BoE) to keep interest rates where they are at 4.75%. The rise in inflation was expected, however it is still not a good sign for the UK economy as growth in November was also unexpectedly weak. The UK seems to be in a bit of a conundrum with rising inflation, high interest rates and slow growth, which seems counterintuitive to most. Lets hope the Christmas break brings a well-needed gift to the UK economic data.

Inflation rose year-on-year for the month of November in the eurozone, rising from 2.0% in October to 2.2% for November. Markets expected a higher inflation figure, so some positive signs for the eurozone. The President of the European Central Banker Christine Lagarde in a press conference said that the ‘darkest days’ of high inflation are behind the eurozone which is another confident sign. These remarks and the better than expected inflation data should set the tone for further interest rate cuts into the new year.

The Federal Reserve decided to reduce interest rates by 25 basis points, from 4.75% down to 4.50%. This was the expected move as the US economy has shown strong signs in recent weeks, such as the better than expected Gross Domestic Product (GDP) figures for Q3. GDP, which is the total value of goods and services in an economy, grew by 3.1% in the third quarter, a rise from 3.0% in Q2, and above the 2.8% which was expected.

Drama in US politics with Trump and his team weighing in on a spending bill. The initial 1,500 page draft of the spending bill was rejected after it seems Elon Musk and his fans took their outrage to Twitter to outline his frustration at some of the contents. After some fierce battling the second draft was agreed by the Senate, and was trimmed by over 1,300 pages to a mere 118 - maybe Elon was right…

Panic in the Brazilian financial markets with the Real hitting a record low against the US Dollar. It is a similar story to many countries around the world, that is, the markets do not think the Government is doing enough to tackle the country's budget deficit, which then causes a sell-off (weakening) of their national currency. Economists have warned that without tough action Brazil’s deficit risks spiralling into an uncontrollable cycle, leading to rising inflation, rising interest rates and slower growth.

The Bank of Japan (BoJ) decided not to raise interest rates in their final decision of the year. This decision was expected, however it still caused a further weakening of the Yen against the dollar, which is already at multi-decade lows. BoJ decision makers said they want to wait for more information to come out from Trump’s camp before making their next move. They also cited high wage growth as another reason for keeping rates the same, as wage growth has surpassed inflation in Japan for the first time in 30 years.

Further weaker-than-expected economic data from China suggests the People’s Bank of China will reduce borrowing rates to spur growth, causing short-term bond yields to fall to their lowest levels since the 2008 financial crisis.

What to watch out for this coming week?

No economic data of interest to be released due to the holidays - even economic data deserves a break!