Investors were on edge ahead of the much-anticipated FOMC announcement, which turned out to be more hawkish than many had predicted. This unexpected development led to significant market reactions. Here’s a breakdown of the key economic updates and how various asset classes responded:
Headlines:
In the U.K., headline CPI increased from 2.3% to 2.6% year-on-year in November, aligning with expectations. The core CPI rose from 3.3% to 3.5%, slightly below the 3.6% forecast. PPI input prices stayed flat in November despite expectations of a 0.2% month-on-month increase, and PPI output prices climbed 0.3% month-on-month, surpassing the forecast of a 0.2% rise. Meanwhile, the Euro area’s final core CPI reading remained at 2.7% year-on-year in November, as expected, though the final headline CPI was revised from 2.3% to 2.2%, contradicting expectations of no change.
In Europe, ECB official Wunsch noted that the effects of potential tariffs would depend on the exchange rate, with a larger depreciation of the euro limiting any negative impacts. ECB official Lane emphasized the importance of evaluating rate changes on a meeting-by-meeting basis, with disinflation progressing well.
Across the Atlantic, U.S. building permits unexpectedly rose from 1.42 million to 1.51 million in November, beating the 1.43 million forecast. Housing starts, however, fell from 1.31 million to 1.29 million, missing the 1.35 million projection. EIA reported a 0.9 million barrel decline in U.S. crude oil inventories, not meeting the expected reduction of 1.6 million barrels.
The FOMC announced a 0.25% rate cut, reducing rates from under 4.75% to under 4.50%, as anticipated. They also added new language regarding the "timing and extent" of future policy actions. Notably, the Fed’s dot plot suggested one fewer rate cut in 2025 than previously signaled.
In New Zealand, the GDP experienced a contraction of 1.0% quarter-on-quarter in Q3 2024, steeper than the expected 0.2% drop. The prior reading was also revised down from 0.2% contraction to a 1.1% decline.
Broad Market Price Action:
Before the Fed decision, most asset classes were in tight consolidation, except for bitcoin, which started declining immediately. Asian equities showed mixed results as investors also eyed policy updates from China and anticipated a statement from the Bank of Japan later in the week.
U.S. Treasury yields initially edged a few basis points lower as traders reduced positions but surged afterward. The 10-year yield rose substantially by 11 basis points to 4.49% following the central bank’s unexpectedly upbeat tone.
The increase in yields likely added pressure on equity markets, leading to the S&P 500 recording a 2.4% drop, its worst decline of the year, while the Russell 2000 fell sharply by 5%.
Gold faced substantial downward pressure due to the stronger dollar. Meanwhile, crude oil stabilized around $70.10, closing off consecutive declines after early support from an API-reported inventory drop of 4.7 million barrels, though it later retreated following the EIA’s report of a smaller reduction.
FX Market Behavior: U.S. Dollar vs. Majors:
The U.S. dollar displayed a mostly steady performance with a slight upward trend against the Australian and New Zealand dollars before the FOMC announcement. During the London session, the dollar gained additional ground, with European currencies and the yen gradually dropping.
This rally in the U.S. dollar was spurred by the Fed’s announcement of the "timing and extent" of future rate changes. The dot plot’s projection of fewer easing measures going forward also boosted the dollar. Further strength was possibly aided by FOMC member Hammack’s dissenting vote and Fed Chair Powell’s comments on September’s inflation forecasts.
President Trump’s remarks about opposing a government shutdown bill may have further supported the dollar, as it fueled expectations that he might prioritize stock market gains over federal deficit concerns.
By day’s end, the U.S. dollar had gained the most against the NZD, up 2.40%, followed by AUD with a 1.89% increase, while USD/JPY and USD/CHF rose by 0.83% and 0.95%, respectively.
Upcoming Potential Catalysts on the Economic Calendar:
- BOJ Policy Statement and Press Conference during the Asian session
- Swiss Trade Balance at 7:00 GMT
- German GfK Consumer Climate at 7:00 GMT
- Euro Area Current Account at 9:00 GMT
- BOE Monetary Policy Decision and MPC Minutes at 12:00 GMT
- U.S. Final GDP quarter-on-quarter & Unemployment Claims at 13:30 GMT
- U.S. Existing Home Sales at 15:00 GMT
- NZD Trade Balance at 21:45 GMT
- Japan National Core CPI year-on-year at 23:30 GMT
Central banks in Japan and the U.K. are set to announce monetary policy decisions soon, potentially prompting movements in JPY and GBP pairs. Although both are expected to maintain current interest rates, the tone of their press conferences and meeting minutes could shape future policy expectations. Keep an eye out for any significant updates!
