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Summary
- Next week sees a flurry of event risk, with the Fed, Bank of Japan (BoJ) and the Bank of England (BoE) rate decisions standing out.
- Price action has been largely sideways the past month for the US dollar index (DXY) and US yields, with rangebound trading predominant.
- Expect markets to remain within the November/December ranges despite potential short-term market volatility from next week’s central bank decisions.
Market Implications
- We stand aside now and wait until January before initiating material positioning.
- We prefer to wait until further policy clarity emerges from the incoming Donald Trump administration.
DXY Chops Around in Tight Range Since Mid-November…
Since topping out on 22 November near 108, the DXY has traded in a relatively tight ~2.5% range (Chart 1).
…As Do US Treasury (UST) Yields
We have seen similar tight ranges in the 2-year and 10-year UST yields.
After hitting its Q4 intraday peak on 22 November near 4.40%, the 2-year UST yield has pulled back and traded in a ~25bps range (Chart 2).
The US 10-year yield has seen a similar dynamic, trading in a ~35bps range since peaking on 15 November (Chart 3).
Upcoming Central Bank Meetings Likely to Trigger Noise
Next week’s Fed (18 December), the BoJ and the BoE (both 19 December) meetings are key.
Market expectations are very well-established ahead of these rate decisions, with the Fed likely to cut 25bps, the BoE expected to stand pat.
Uncertainty about the BoJ exists, but expectations for a rate hike this month have receded in recent weeks, so chance for a major surprise is now less likely.
Fed (18 December)
The Fed’s policy announcement will almost certainly produce another 25bps cut, taking the target for Fed Funds to 4.25-4.75%.
In her Fed preview, Dominique Dwor-Frecaut says the central bank is likely to cut next week as it believes policy is still restrictive and risks to the mandate are balanced.
Despite disinflation stalling, all FOMC members still think inflation is returning to 2%.
As such, a 25bps cut is broadly expected next week, and is fully priced.
BoJ (19 December)
Uncertainty for the BoJ meeting is much less than two weeks ago.
On 29 November, the market was pricing ~17bps of hiking for next week’s rate decision.
However, the market is now pricing only 5bps of tightening.
Today, Reuters say the BoJ is leaning towards keeping rates steady next week.
The central bank wants to spend more time scrutinising overseas risks and clues on next year’s wage outlook before moving on policy.
Given the dialling back of market expectations, solidified by the Reuters piece, an on-hold BoJ probably will not surprise markets much.
BoE (19 December)
Virtually nothing is priced for next week’s BoE policy update, which makes a hold highly likely.
Recent UK data has been mixed, although the most recent inflation data, which beat expectations, sealed the market’s conviction the BoE would remain on hold this month.
Meanwhile, Henry Occleston says BoE market pricing in 2025 is too hawkish.
Anything but a hold next week would be a major surprise and is highly unlikely.
Next Big Market Moves Depend on Trump Administration
This all means that although price action next week might be choppy and noisy, we do not expect any major market moves from these central bank policy updates.
Instead, we think the incoming Trump administration will catalyse the next notable market price action.
Yet, we only have minimal clarity on Trump’s policy direction.
As Dominique wrote this week, we still know little about the Trump administration’s key policies, budget deficit, tariffs and immigration.
Key economic nominees so far suggest a focus on market performance and median household income growth.
These need not conflict if growth remains high enough, but we need information to assess whether this is a realistic prospect.
As such, until we get further clarity on these key policies, markets will probably continue chopping around within the past month’s ranges.
Technicals Say Be Patient and Await News From Washington, DC
While awaiting fundamental drivers from Washington, technical indicators are broadly neutral for the DXY and USTs.
Using the 30/70 rule for Relative Strength Indices (RSIs), which we have discussed at length in previous notes, the DXY RSI is at ~57, a neutral reading, between the 30 level (oversold) and 70 level (overbought).
With this neutral RSI reading, no technical impetus exists for the DXY to move sharply in either direction (Chart 4).
It is the same with USTs.
The table below shows UST futures contracts ranging from 2-year notes to 30-year bonds.
All RSIs are neutral (second column from the left in the table) like the DXY RSI, below 70 and above 30.
As such, no technical impetus exists for UST yields to move sharply in either direction.
With fundamental drivers from Washington yet to emerge, and short-term technical indicators neutral, we are patient on positioning.
That can wait until next year.