Figure 1: G10 FX Performance Tracker [vs. USD] (1 week)

Source: LSEG Datastream Date: 16/12/2024

USD

The inflation report for November came out exactly as expected. Most notable was that the monthly number printed at 0.3% for the fourth consecutive month, consistent with an annualised rate just below 4%. This will undoubtedly be a concern for FOMC officials, and will raise anxiety levels among the committee that progress on bringing down US inflation has stalled.

Figure 2: US Core Inflation Rate (2014 – 2024)

Source: LSEG Datastream Date: 16/12/2024

While we expect the Fed to cut rates by 25 basis points this week, we expect the forward guidance to move in a hawkish direction. Chair Powell will likely continue to stress that US growth remains strong, and that the labour market continues to add jobs at a solid pace, despite the miss in the October payrolls report. The key to the USD reaction will likely be how many cuts are indicated in the dot plot of rate projections. Futures markets are currently pricing in three rate reductions in 2025, but we think that it may be a struggle for the Fed to justify more than two.

EUR

The last European Central Bank meeting of the year delivered on what most of the market had expected: a 25 basis point cut, and a somber downgrade of its expectations for Eurozone growth in 2025 and 2026, which Lagarde hinted could be negatively impacted by Trump’s tariffs. The HICP projections were left largely unchanged, although the bank did revise downwards its view for core inflation

The downbeat assessment probably means that there will be additional cuts at every meeting in the first half of 2025. The euro took this in stride , in large part as markets were already pricing in a very dovish message prior to the meeting, and the common currency managed to end the week just above the 1.05 level against the dollar. The next big test will be the December flash PMIs of business activity, which took a dive in November after Trump’s electoral victory. A rebound here is not out of the question now that the initial shock has worn out.

GBP

Last week’s highly disappointing October GDP data, which showed the first back to back monthly contraction since the COVID-19 pandemic (-0.1%), sets the stage for this week’s Bank of England meeting, which will take place right after the PMIs and the November labour and inflation reports are released. It is unusual to see a central bank decision held immediately after such a deluge of economic data, but the latter are not expected to sway the MPC into cutting rates.

We see no change as a near certainty this week, indeed markets are only pricing in 4 basis points of cuts. This week’s data could, however, impact the number of dissenters who vote for a cut (7-2 currently seen by the consensus). We think that high rates, resilient growth and continued rapprochement with the EU will enable sterling to rise against both the dollar and the euro going into 2025.

Figure 3: UK GDP [% MoM] (2020 – 2024)

Source: LSEG Datastream Date: 16/12/2024

RON

An intense election period is behind us. Well, maybe not completely, as we are still waiting for the presidential election date to be re-scheduled and the new government to be formed. The data itself did not give much time for respite last week, confirming the trends observed in recent months. Firstly, inflation remains resilient, and the highest in the region – in November it returned to 5.1%, last seen in August. Secondly, the country’s trade situation does not look too bright, with the trade deficit increasing by 33% on an annual basis, reaching an all-time high in October (€3.72bn). In the same month, the current account deficit (somewhat broader in its definition) reached 8% of GDP.

Figure 4: Romania Trade Balance [$ bn] (2004 – 2024)

Source: Bloomberg, 17/12/2024

Some improvement in this respect can be expected – perhaps – when Romania joins the Schengen area (1 January 2025), as has been confirmed in recent days. The decision follows Austria’s agreement to lift its veto against their accession, which had previously stalled their entry due to concerns over migration management. According to the European Economic and Social Committee (EESC), Romania was losing around EUR 2.32 billion yearly in revenues due to not participating fully in the Schengen regime. Of course, such development does also bring risks, such as a greater brain drain or the influx of new, often cheaper substitutes for products manufactured by Romanian companies. Ultimately we see this rather as a a great opportunity for the Romanian economy, however, particularly for the tourism, trade and logistics sectors.

PLN

It was a fairly quiet week for the Polish currency. There were few publications from the domestic market, thus the zloty was dependent on external stimuli – the weakening of the euro in the face of the ECB’s downgraded growth forecasts and a reading indicating a certain resistance to US inflation. Out of analytical duty, our attention was drawn to the first current account surplus since June, which in fundamental terms is favourable for the Polish currency. It was largely the result of a positive balance of services and money transfers. The trade balance itself (trade in goods) has remained at negative levels for six months, which clearly demonstrates the growing divergence in consumer demand in Poland and the euro area (to which nearly 60% of Polish exports are directed).

Figure 5: Poland Current Account Balance [€ bn] (2019 – 2024)

Source: Bloomberg, 17/12/2024

Much more interesting days lie ahead in terms of macroeconomics. A number of readings for November await us. On Monday, we received news on core inflation (up to 4.3%). On Thursday (19.12), we will see news on wage growth, employment and industrial production, while the week will close with perhaps the most important publication – retail sales (Friday 20.12). Local news could be overshadowed by Thursday’s FOMC meeting. After the EUR/PLN pair went below the level of 4.26 on Monday morning, there were hopes for a breakthrough of the psychological barrier of 4.25, however, we consider it unlikely. We regard the balance of risks for the zloty as directed upwards for the next few days, i.e. with a predominance of potential depreciatory factors.

HUF

The forint has recovered much of its losses recorded in November last week – it seems that Moody’s revision of Hungary’s credit outlook back to ‘neutral’ was somewhat of a driving force for the currency. The move was likely supported by short positioning, i.e. the profit-taking of some investors betting on declines in the currency. Meanwhile, inflation came in below expectations but rose again to 3.7%. The core measure remains even more elevated (4.4%).

Figure 6: Hungary CPI & Core CPI Inflation (2021 – 2024)

Source: Bloomberg, 17/12/2024

Combining this with a number of pro-inflationary factors, including the issue of wage growth still nearing double digits in real terms, we get a picture of an economy in which price pressures are still a live and real problem. The absence of an interest rate cut at the bank’s last meeting of the year, on Tuesday, is therefore not surprising, particularly in view of the significant weakening of the forint over 2024 – it alone affects the economy in a manner similar to interest rate cuts.