A handful of Fed officials have been on the wires since the end of last week, pushing back against what they see as aggressive market pricing of up to six quarter-point interest rate cuts next year. Messrs Williams and Bostic last Friday started the move saying that interest rate cuts were not being discussed at present, while yesterday Cleveland Fed President Loretta Mester said that markets were getting ahead of themselves in pricing in rate cuts. Chicago Fed President Goolsbee suggested yesterday that markets were hearing what they wanted to hear and not what the Fed was saying. 

The latest CME Fed Fund rate probabilities show the US central bank cutting rates by 150 basis points next year with the first 25 basis point cut seen at the March meeting. 

USDCAD - The CAD is little changed on the session, holding just below yesterday’s intraday peak for the USD slightly above 1.34. Canadian CPI is expected to fall 0.1% in November (Scotia expects –0.2%) and drop to 2.9% in the year (from 3.1% in October). The consensus had settled a little lower (-0.2% M/M, 2.8% Y/Y) until a few late forecasts were captured in the survey yesterday. Core Trim is expected to ease to 3.4% Y/Y (from 3.5%) while the Core Median is forecast to fall to 3.3% (from 3.6%). While headline inflation is falling back to within the BoC’s inflation target range, Governor Macklem’s comments last week clearly show the central bank is not celebrating a victory over inflation just yet. Headline inflation needs to get closer to 2% and core inflation needs to fall further. Signs of sticky prices today will give the CAD a mild lift at least.

EURUSD - Final November Eurozone CPI showed prices falling 0.6% in the month for a 2.4% gain in the year. Prices rose 2.9% in the October year. Underlying price trends moderated in November but remain elevated, as does services inflation. ECB policymakers have weighed in on the rate outlook—Villeroy said rate cuts should happen in 2024 after holding them sufficiently high to weigh on inflation. Remarks from Simkus and Vujcic suggested current pricing is too optimistic, however.

GBPUSD - The GBP lost ground for little obvious reason yesterday but is making some ground back this morning. BoE DG Boradbent warned that sticky wages may mean the BoE has to hold rates high for longer to drive out domestic inflation, further delineating the BoE policy outlook from that of the Fed. MPC member Breeden is speaking at 8ET.

USDJPY  -The Bank of Japan (BoJ) voted to keep short term rates at -0.1% and left the yield curve control unchanged. After a Bloomberg report on the 11th of December suggested the final BoJ meeting of 2023 was unlikely to see any movement on rates, the majority of the market eased expectations of a rate hike but clearly some still held out as the yen dropped moments after the announcement. 

Governor Kazuo Ueda mentioned that there are still many uncertainties around the economy but that officials anticipated modest, above trend growth. The Japanese economy is likely to see an improvement from Q3’s 0.7% contraction (QoQ) as oil prices have come down notably in the final quarter of the year for the net importer of oil. Question marks remain for inflation and wage growth as the bank seeks compelling evidence that both are likely to rise consistently.