Economic Update

US Federal Reserve expected to cut rates – what does this mean for the outlook?

The Federal Reserve’s policy decision on Wednesday is the week’s main event. Most forecasters anticipate a 25-basis-point reduction in the Fed Funds target range to an upper bound of 3.75%. Markets have largely priced this in, so the move alone may not trigger significant volatility. Attention will turn to the updated dot plots and Chair Powell’s press conference for any indication of the pace and conditions for further cuts. Additional data releases this week will help assess whether October’s rate cut was justified, though they are likely to be more relevant for historical context than immediate policy. For the US dollar, limited movement is expected ahead of the meeting, with post-decision direction hinging on any changes to the dot plots.

Sterling faces a test as UK data takes center stage

The pound has strengthened in recent weeks against both the US dollar and the euro, driven largely by external factors rather than domestic developments. Last week’s gains were supported by US labor market weakness and Euro Area political uncertainty, alongside a modest boost from the UK services PMI. This week’s focus shifts to domestic data: the REC/KPMG jobs report showed salary growth after months of stagnation, though overall labor conditions softened. Monthly GDP and industrial production figures for October will be critical ahead of next week’s Bank of England meeting. Sterling faces resistance near $1.34 and €1.1460; failure to break higher could see a retreat towards $1.3240 and €1.1370.

ECB outlook: is a hike really the next move?

ECB Governing Council member Isabel Schnabel has indicated comfort with market expectations for a rate hike. That confidence may be misplaced. While inflation and wage growth remain concerns, Euro Area growth continues to falter, led by German and Italian weakness. Upcoming secondary data releases are unlikely to shift the narrative away from subdued growth and inflation anchored near the 2% target. Political uncertainty in Germany persists despite the narrow passage of a pensions bill, adding to the coalition’s challenges. These dynamics suggest the ECB may find it difficult to justify tightening in the near to medium term.

Canadian labor market surprises again, but BoC likely to hold

Canada’s November employment report delivered another upside surprise, with job gains and a lower unemployment rate. Wage growth for permanent employees held at 4% year-on-year. However, the increase was driven by part-time roles, while full-time employment declined slightly. The Canadian dollar strengthened, pushing USDCAD to its lowest level since September. The Bank of Canada is expected to keep rates unchanged this week, and further easing in Q1 appears unlikely given labor market resilience. That said, the reliance on part-time jobs and weak GDP growth under US tariff pressure remain concerns. CAD performance may hinge on US developments.

Banxico faces a dilemma as inflation rises

Mexico’s central bank meets next week, with markets expecting a 25-basis-point cut in line with the Fed. Yet stronger labor data and higher November CPI argue for caution. The peso’s recent strength, reaching 18-month highs, could offset imported inflation pressures, leaving room for a cut. If markets have already priced this in, the move may do little to reverse MXN gains.