ACM Update 06-01-25
The festive period can often see quiet(er) trading conditions and little market movement. But a host of major central bank meetings just before Christmas meant the end of 2024 was full of volatility, especially for those with an eye on the US Dollar.
The first full trading week of the New Year now delivers the latest round of Non-Farm Payrolls data for December, amidst a handful of speeches from policymakers on both sides of the Atlantic.
Welcome to 2025 and a brief festive round-up of all the action over the last few weeks, as well as a look at the bigger picture from the last 12 months.
The Dollar had the busiest Christmas, gaining some 3% versus GBP since mid-December, as well as similar progress versus the Euro. The shift came amidst the Federal Reserve cutting interest rates (as expected) on 18th December. The main market-mover though was a change in narrative on what to expect in 2025, with policymakers foreseeing the need for three cuts in the year, slashed from six previously.
The change in stance was a major shift and naturally this drove Dollar strength over the festive period. We saw GBP-USD returning to levels last seen in April, with the yearly range almost hitting a 10% swing from high to low throughout the year. The picture against the Euro was similar too, with almost a double-digit range in 2024.
The Fed will also have one eye on Donald Trump going into the new year. His proposed tariffs to be delivered once he steps into office on 20th January, could well have an upward impact on inflation in the US if he proceeds as proposed/threatened. These could easily wipe out all the work from Powell & Co in recent months, as costs increase for both producers and consumers. This is a major factor in the change in 2025 policy projections from the Fed.
US growth meanwhile remains strong and maintained a healthy track last year. Admittedly it is expected to slow slightly into 2025 and beyond, but should still be well ahead of G7 peers.
The old saying goes “never bet against the Dollar” and this indeed proved to be the case last year. Geopolitics, Trump and a change in monetary policy saw the Dollar recover considerable ground over the second half of the year versus other majors. It will be interesting to see how these three factors play out this year.
For an overall view, please see the chart below for GBP-USD action over the past twelve months:
On the sterling side of the coin, the Bank of England opted to hold their own base rate on 17th December. Again, this was the expected outcome. The hold meant we saw just two rate cuts (August & November) from the MPC in 2024. UK interest rates are now the highest of the major central banks, as most Bank of England policymakers look to maintain gradual cuts this year.
However, they still have an eye on inflation. Trump’s tariffs could also drive inflation up in the UK too, with higher consumer costs on British soil. Another factor to consider under the inflation banner is the impact the October Budget will have. The ramifications are still filtering through, but many large companies have already declared that they will be passing on higher National Insurance costs to employees.
One factor which may see interest rates coming down faster is the current flatlining UK GDP situation. If the trend continues, this may force the Bank’s hand on cutting rates. Such a move would logically encourage consumer spending, as well as bringing mortgage rates down and thus providing more disposable income. All of this would, in theory, stimulate some form of economic growth. Watch this space.
In the Eurozone, Christine Lagarde recently declared “the darkest days of winter look to be behind us” and she wasn’t talking about the weather. The ECB President was as close as she has been to declaring victory over inflation in the bloc, and confirmed that “we expect to lower interest rates further”.
Such a statement only tells half the story though, as the ECB are juggling two issues at present. Inflation seems to be broadly under control on the continent, despite a slight bounce back up in the metric towards the end of last year. This was in line with other major economies, admittedly.
Their biggest problem now seems to be economic growth. Spain remains the only major Eurozone economy to be producing promising growth figures, whilst those in France & Germany are lacklustre at best. The growth picture is more likely to be the driver of rate cuts this year, and we expect to see Eurozone interest rates settle at a lower figure (terminal rate) than those in the UK or US.
The Euro had a pretty weak Christmas as a result of Lagarde’s comments, which followed the ECB’s fourth cut of 2024. Lagarde too may be at the mercy of the incoming US President as his plans would not only drive inflation back up in the Eurozone, but also not help the low growth figures there if exports to the US take a hit.
The Euro traded slightly more narrowly versus sterling than other currencies in 2024, the pair maintaining roughly a 5% range. Deviations in monetary policy could well keep sterling strong into 2025, especially if we see continued rate cuts from the European Central Bank.
Movements on GBP-EUR last year can be seen in the chart below:
The week ahead:
Monday – German CPI inflation (08:00 UK time), SPA/ITA/FRA/GER/EU/UK/US Services PMI (08:15-14:45)
Tuesday – Swiss CPI inflation (07:30), UK Construction PMI (09:30), EU CPI Flash Estimate (10:00), US ISM Services PMI & JOLTS Job Openings (15:00)
Wednesday – Australian CPI inflation (00:30), US ADP Non-Farm (13:15), US Unemployment Claims (13:30), Fed Waller speech (13:30), Federal Reserve Meeting Minutes (19:00)
Thursday – Fed Harker speech (14:00), MPC Breeden speech (16:00), Fed Barkin (17:40) Fed Bowman (18:35) speeches
Friday – UK NIESR GDP estimate (07:00), Non-Farm Payrolls & Unemployment data (13:30)
Next Central Bank meetings:
-Federal Reserve – 29th January
-European Central Bank – 30th January
-Bank of England – 6th February
So as we enter the New Year, most eyes this week will be on the US jobs data from December. These are being released a week later than usual due to the Christmas break. They will reach a crescendo on Friday, with the Non-Farm Payrolls figure as well as the overall Unemployment numbers.
As always, these will be another indicator of economic performance in the US, and any sudden drop-off such as that seen in the October data, may well create some revised expectations on interest rates going forwards.
The minutes of the most recent Federal Reserve meeting also make an appearance this week, on Wednesday evening. These will give further colour on just how much discussion there was regarding rate projections this year in the December meeting.
On the UK side, a quiet start. A couple of minor speeches from Bank of England policymakers, as well as the latest estimated growth figures from the NIESR (National Institute of Social & Economic Research). The Eurozone front is even quieter, with just the Services PMI figures and the latest CPI inflation estimate.
Looking back at 2024, between 5-10% was the norm in terms of FX movements throughout the year. For those buying a property overseas, or paying invoices in foreign currencies, such percentage swings can make a vast difference in spending power. With further economic, political and geopolitical factors to come this year, we could well see more movement than the 10% of last year!
Make sure to reach out to the Aston team for more assistance on how to protect your FX exposure.
Have a great week and Happy New Year from the Aston team.
