Still restrictive, but not for long

Central Bank

Summary:

The ECB cut rates by 25bp, but now sees inflation risks more two-sided. More rate cuts lie ahead, but the ECB still seems to be on a path of normalisation and does not appear to be in a hurry on that path. We still see the bottom of rates at 2.25%.

The ECB expectedly cut rates by another 25bp and tweaked its statement while keeping concrete changes limited. The ECB dropped the pledge to keep rates sufficiently restrictive for as long as necessary and instead just said that it is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. Rates are still seen restrictive, but easing financing conditions are already making new borrowing less expensive.

The ECB staff now expects a slower recovery, while the disinflation process is well on track. Changes to the inflation forecasts were moderate, and core inflation is seen at 2.3% in 2025 and 1.9% in both 2026 and 2027, i.e. more or less in line with the target.

The reaction function was kept unchanged and future decisions will still be based on the assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The ECB is not pre-committing to a particular rate path, while future decisions will be made via a data-dependent and meeting-by-meeting approach.

In light of today’s message, we retain our baseline forecast for 25bp rate cuts at every ECB meeting until April next year, when we see the deposit rate hit 2.25%. Risks remain firmly tilted to the downside for this view.

In the Q&A, Lagarde said there had been discussions on a 50bp cut, but in the end there was a strong rally towards 25bp. She added that while upside inflation risks had not vanished, risks to prices are now more two-sided. Lagarde did not offer any new estimates on where the neutral level of rates might lie, as this topic was not discussed. She said the direction of travel was quite clear, but the pace was not and a lot of ground had already been covered.

Financial markets interpreted the message initially slightly dovishly, but the tone changed, when Lagarde emphasised that a lot had already been done, which markets interpreted as suggesting limited room for further easing. The market is currently pricing in around 30bp of easing for the January meeting, i.e. a clear bias in favour of another 25bp cut. The bottom for the deposit rate is priced at around 1.75%. While financial markets are already pricing in steeper cuts than we have in our baseline, weak data could easily push rate expectations further downwards.

More rate cuts ahead

Lower rates already helping to boost loan demand

Only small changes to the ECB projections

The revisions to the ECB September projections were small, just like expected. Somewhat surprisingly, the ECB expects only 1.1% growth next year compared to 1.3% in September. This was said to be mainly due to weak survey data (PMIs) since the last forecast round. GDP data actually surprised the ECB to the upside in Q3. Thus, the ECB sees that the recovery will be rather weak and it will rely much on higher real income and consumption. The ECB continues to see risks to be biased to the downside and compared to the ECB’s earlier projection rounds, one can consider the 1.3% forecast for 2027 growth to be quite weak.

It seems that in general, the ECB has perhaps lowered its long-term growth potential given that despite the weaker GDP numbers, the revisions to the inflation forecast were very small especially for the core inflation and mainly took place in the short-term.

Inflation is seen to return to the 2% target in the course of 2025 and risks around inflation are to both directions. Inflation can turn out to be sticky if wages continue to rise fast and also trade restrictions can cause cost pressures in parts of the supply chains.

The ECB staff sees inflation returning to the target in the course of 2025

Source:ECB Watch

Risk Warnings and Disclaimers

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Danske Bank

Central Bank

Since the FOMC participants filed their latest economic projections in mid-September, market pricing for real terminal policy rate has shifted roughly 60bp higher. Real 1y forward OIS curve stabilizes around 1.7-1.8% level, which is 0.8-0.9% above the September median real long-term dot. While 25bp cut next week is mostly a done deal, the true focus is on how FOMC’s terminal rate view has shifted alongside markets.

While part of the increase in market pricing can be attributed to term premium (NY Fed’s ACM model estimate for 10y term premium is roughly 30bp higher than 3M ago), markets are discounting in expectations of more resilient economy and supportive fiscal policy.

But while we wait for the details on the latter, we struggle to see why the Fed should suddenly be more concerned with the economy overheating again. This week’s CPI data showed continuing cooling in both housing and non-housing services inflation, suggesting that the underlying disinflation trend remains on track. The ratio of job openings to unemployed has stabilized around 1.1, which suggests labour market balance is slightly cooler than before the pandemic. Both market and survey-based measures of inflation expectations remain well aligned with the 2% target.

Still low level of mortgage applications and weak commercial loan demand signals from the Fed’s latest SLOOS data also suggest current policy stance remains restrictive. As such, we think the Fed can continue to reduce rates towards neutral not just next week, but also into 2025. And when it comes to estimating the neutral level, we do not think the magnitude of the shift in market pricing is quite yet justified. More modest upward-shift in longer-term dots could be a dovish surprise for the markets.

We expect minor positive revisions to GDP and inflation forecasts for 2024 & 2025 but think 2026 forecasts will remain stable. We think Powell will aim for a neutral tone in his remarks, but he is still likely to verbally open the door for slowing the pace of cuts, in line with what we have heard from other Fed commentators lately. Markets are currently pricing in only 6bp for the January meeting, and we do not expect a dramatic re-pricing after next week, as the decision ultimately hinges on data released later on. 10-12bp (or close to 50/50) would be a fair level at this stage in our view. Markets’ most likely scenario includes 25bp rate cuts in every other meeting during H1 2025, but we still believe the Fed will end up cutting rates in every meeting until June.

ON RRP cut would not predict an imminent end to QT

The Fed could also deliver a 5bp additional technical reduction to the ON RRP rate asdiscussed in the November minutes, which would align it with the lower bound of the FedFunds target range. We do not think it would have a significant impact on the overall policystance, but rather, such a move should be seen as a sign of the Fed wanting to err on theside of caution amid the risk of repeating the repo market turmoil in September 2019.All else equal, the reduction would make it less attractive for money market funds to parkcash into the facility, which could then provide a positive boost to markets’ liquidityconditions. ON RRP usage peaked above USD2300bn around two years ago, but the levelhas already declined to around USD150bn, meaning the impact would be modest eitherway.

Market-based overnight repo rate (SOFR) has traded mostly in tandem with the Fed Fundsrate over past years, but as liquidity conditions have gradually tightened due to QT, SOFRhas seen occasional spikes around month and quarter turn dates. The very latest fixingshave been on the higher side again, which could increase the likelihood of the cut.If the Fed does decide to cut the ON RRP rate, Powell would certainly face questions aboutthe future of QT, which is still draining liquidity at a rough pace of USD40bn/month.

However, the near-term liquidity outlook does not appear too concerning in our view. TheUS debt ceiling suspension ends at the beginning of 2025, which means that the governmentwill start to utilize its cash balance to fund the ongoing deficits until the ceiling is lifted orsuspended again. This could theoretically boost liquidity by as much as USD775bn overthe course of H1 2025. If the remaining funds from the ON RRP facility would also getdrained back to the market, the level of bank reserves could even start rising again despitethe QT. As such, we do not expect the Fed to halt the QT before H2 2025 at earliest. Readmore from the STIR section of RtM USD – December cut in the horizon, 10 December).

Source:Danske Bank

Risk Warnings and Disclaimers

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Glendon

Economic

The Forex market, known for its volatility and liquidity, offers traders numerous strategies to maximize profits. Among these, the Martingale trading strategy stands out for its counterintuitive nature and potential for both massive rewards and significant risks. While the strategy has its roots in 18th-century gambling systems, it has found a place in the portfolios of bold Forex traders.

But does this high-risk strategy have a place in modern Forex trading? Let’s explore its unique approach and how to use it effectively.

What is the Martingale Strategy?

At its core, the Martingale strategy involves doubling down on a trade after a loss. The idea is to recover all previous losses and make a profit once the market turns in your favor. For example:

A trader starts with a $100 position. If the trade results in a loss, they open the next trade with $200.After another loss, the position is increased to $400.

The premise is simple: a single winning trade can offset all losses, provided the account has sufficient capital to withstand consecutive losing trades.

Why Martingale Appeals to Forex Traders

Forex’s natural oscillations between highs and lows make it an attractive playground for Martingale. Key reasons include:

High Liquidity: Forex pairs often retrace, offering opportunities for the market to turn around.

24/5 Market Availability: Continuous trading allows positions to stay open without weekend interruptions.

Leverage: Forex platforms often offer significant leverage, making it easier to double positions.

The Risks of the Martingale Strategy

While the strategy sounds promising, it carries substantial risks. The largest danger lies in capital exhaustion:

Unpredictable Trends: Markets can trend in one direction for extended periods, depleting funds.

Margin Calls: Increasing trade sizes can quickly surpass margin limits, leading to forced closures.

Emotional Strain: The pressure of increasing stakes can lead to panic, poor decision-making, and account ruin.

For instance, in a prolonged bearish market for a currency pair, using the Martingale strategy without safeguards could result in devastating losses.

A Modern Take: Enhancing the Martingale Strategy

To mitigate its inherent risks, traders have adapted the Martingale strategy with modern techniques:

Use Stop Losses: Setting predefined exit points prevents runaway losses.

Pair Selection: Focus on stable currency pairs with historical patterns of mean reversion.

Account Sizing: Allocate a portion of the capital to Martingale trades while keeping the rest as a safety net.

Combine with Technical Analysis: Use indicators like RSI or Bollinger Bands to time entries and exits effectively.

Limit Doubling: Cap the number of successive doubling trades to prevent catastrophic losses.

Is Martingale Suitable for You?

The Martingale strategy isn’t for everyone. It appeals most to risk-tolerant traders with significant capital reserves and strong discipline. Beginners or those with limited funds may find the risks outweigh the rewards.

However, when used cautiously and in conjunction with robust risk management, Martingale can be a powerful tool to capitalize on market reversals.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Glendon

Economic

The Forex market is the world’s largest financial playground, bustling with over $7 trillion in daily trading volume. Among its varied trading avenues, Forex spot trading is one of the most direct and straightforward methods, making it a favorite for many traders. But what makes spot trading unique? What opportunities and challenges does it present?

Let’s dive into the dynamic world of Forex spot trading from a fresh perspective.

What is Forex Spot Trading?

Forex spot trading involves buying or selling currency pairs with immediate settlement, typically within two business days. Unlike futures or options, which are contracts for a later date, spot trading focuses on the current market price — or the "spot price."

For instance, if you trade the EUR/USD pair, you’re exchanging euros for U.S. dollars at the prevailing exchange rate. The simplicity of this mechanism is why many traders start with spot trading before exploring other Forex instruments.

The Allure of Spot Trading

Spot trading’s appeal lies in its immediacy and transparency:

Simplicity: Traders deal with real-time exchange rates, making it ideal for those who prefer straightforward transactions without complex contracts.

Liquidity: With high trading volumes, especially in major currency pairs like EUR/USD or USD/JPY, traders can easily enter or exit positions.

No Expiration: Unlike derivatives, spot trading has no expiration date, allowing traders to hold positions as long as needed.

Leverage Opportunities: Many Forex brokers offer leverage, enabling traders to control larger positions with smaller initial investments.

A Unique Angle: Forex Spot Trading for Hedgers

While spot trading is commonly associated with speculation, it plays a vital role for businesses and individuals looking to hedge currency risk. For example:

Corporations: A U.S.-based company paying for goods in euros can use spot trading to lock in favorable exchange rates.

Travelers: Tourists exchanging currency at banks or money changers are effectively engaging in Forex spot trading, albeit on a smaller scale.

This hedging aspect adds a layer of practicality to the otherwise speculative nature of Forex markets.

Risks in the Spot Trading Arena

While its simplicity is a strength, Forex spot trading isn’t without risks:

Volatility: Currency prices can change rapidly due to geopolitical events, economic reports, or market sentiment.

Leverage Risk: While leverage amplifies gains, it also magnifies losses, potentially wiping out an account quickly.

Overtrading: The ease of spot trading can tempt traders into frequent trades, leading to higher transaction costs and emotional decisions.

Tips for Spot Trading Success

To succeed in Forex spot trading, traders need more than just market knowledge:

Start with Major Pairs: Stick to liquid pairs like EUR/USD for tighter spreads and more predictable movements.

Incorporate Risk Management: Use stop-loss orders and position sizing to limit exposure.

Stay Updated: Monitor global news and economic events that can impact currency values.

Blend Fundamentals with Technicals: Combine analysis of economic indicators with chart patterns for more informed decisions.

The Future of Spot Trading

With the rise of AI tools, predictive analytics, and algorithmic trading, Forex spot trading is evolving. Traders are now leveraging advanced tools to analyze market trends, reduce risks, and capitalize on opportunities. While human intuition still plays a role, technology is reshaping how traders approach the spot market.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Glendon

Economic

Breakout trading is one of the most dynamic and exciting strategies in financial markets. It centers on the premise of capturing explosive price movements as they breach established levels of support or resistance. For traders seeking to ride momentum waves, this strategy can unlock substantial profits — provided they know how to time it right.

What is Breakout Trading?

Breakout trading is all about identifying when an asset’s price "breaks out" of a defined range or chart pattern. This breakout often signals a surge in volatility and marks the start of a significant trend.

For instance, imagine a stock trading within a tight range of $50 to $55. If it suddenly breaks above $55 with increased trading volume, this could indicate a bullish breakout, presenting an opportunity to buy. Conversely, a break below $50 might signal a bearish breakout and an opportunity to sell or short.

A Unique Angle: The Psychology Behind Breakouts

Breakout trading isn’t just about numbers on a chart; it’s deeply rooted in trader psychology. Resistance levels often represent psychological barriers where traders previously sold, fearing prices might fall. When these levels are broken, it reflects a shift in market sentiment — optimism among buyers or panic among sellers.

By understanding this psychological battle, traders can better anticipate whether a breakout will be sustained or if it’s a false signal (a "fakeout").

Benefits of Breakout Trading

Early Entry in Trends: Breakouts often mark the start of significant market moves, allowing traders to enter positions early.

Defined Risk Levels: Traders can set stop-loss orders near breakout levels, minimizing potential losses.

Versatility: This strategy works across multiple asset classes, from Forex and stocks to commodities and cryptocurrencies.

Risks of Breakout Trading

While breakout trading can be profitable, it comes with its share of risks:

False Breakouts: Not all breakouts result in sustained trends. Prices might briefly breach levels only to reverse, trapping traders in losing positions.

Whipsaws: Market volatility can cause erratic price movements around breakout levels, leading to losses.

Overtrading: The frequency of breakouts in active markets can tempt traders into overtrading, increasing transaction costs.

How to Master Breakout Trading

Focus on Volume: A true breakout is often accompanied by a spike in trading volume, indicating strong market interest.

Use Confirmation Indicators: Tools like Moving Averages, RSI, or Bollinger Bands can help confirm breakout validity.

Set Realistic Targets: Define profit levels based on the asset’s historical volatility or use Fibonacci retracement levels for guidance.Manage Risk: Always use stop-loss orders to protect against unexpected reversals.

Breakout Trading and Market Conditions

The success of breakout trading often hinges on market conditions. It works best in trending or volatile markets but is less effective during sideways consolidation. For example, breakout traders thrive during earnings seasons or central bank announcements when markets are flooded with news and uncertainty.

The Future of Breakout Trading

With the advent of AI and machine learning, traders now leverage algorithms to detect breakouts in real time. These tools analyze historical data, volume spikes, and price momentum, enhancing precision and reducing human error. However, human intuition and experience remain irreplaceable in evaluating the broader market context.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Justin

Economic

The U.K. economy contracted unexpectedly in October amid uncertainty from businesses and consumers ahead of the newly elected government’s budget announcement.

Gross Domestic Product fell by an estimated 0.1% on a monthly basis, the ONS said Friday, with officials attributing the downturn to a decline in production output. Economists polled by news agency Reuters had projected a 0.1% rise in GDP in October.

It marked the country’s second consecutive economic downturn, following a 0.1% GDP decline in September.

Real GDP is estimated to have grown 0.1% in the three months to October, the ONS said, compared to the previous three months ending in July.

Sterling declined on the back of the disappointing print, trading 0.3% lower against the U.S. dollar at $1.2627 by 7:45 a.m. London time.

In a statement on Friday, U.K. Finance Minister Rachel Reeves conceded that the October figures were “disappointing,” but defended the government’s divisive economic strategies.

“We have put in place policies to deliver long term economic growth,” she said, citing changes such as a cap on corporation tax and the launch of a 10-year infrastructure strategy.

In late October, Reeves unveiled the government’s first budget since replacing the longstanding Conservative government in July.

The budget included plans from Prime Minister Keir Starmer’s government to raise taxes by £40 billion ($50.5 billion). Reeves said at the time that this would be achieved through a raft of new policies, including a hike in employer National Insurance payments — a tax on earnings — as well as a rise in capital gains tax and the scrapping of winter fuel payments to pensioners.

Some of the policies have been met with widespread criticism. The national insurance payroll tax hike, for example, has prompted warnings from businesses that they will be less likely to take on new workers, with a report from recruitment site Indeed this week suggesting the policy had already had an effect on British job openings.

Interest rate impact

The October GDP print marked a fresh blow to the U.K. economy, which is still struggling to keep inflation in check and also saw weak consumer confidence data in a new reading published Friday.

However, market watchers are not convinced the latest data will alter the Bank of England’s commitment to a “gradual” lowering of interest rates.

The central bank cut rates by 25 basis points at its most recent meeting in November, and is expected to hold rates steady at 4.75% at its subsequent meeting next week, according to overnight index swap data.

Thomas Pugh, U.K. economist at RSM, said the fresh round of data — coupled with inflation in Britain creeping back up toward 3% — indicated a risk that the U.K. was “slipping back into stagflation territory.”

“We still expect the economy to reaccelerate into 2025 — that said, our forecast of 0.3% quarter-on-quarter growth in the fourth quarter now looks too ambitious,” he said.

“In any case, we doubt that today’s data is bad enough to push the Bank of England into surprising markets with an early Christmas present of a rate cut at its meeting on Dec. 19th.”

Meanwhile, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, agreed a Christmas rate cut was “doubtful.”

“Despite these gloomy figures, the likelihood of a rate cut this month remains low with some policymakers likely to be concerned enough by the recent pick-up in inflation to defer relaxing policy again until February,” Thiru said in a note.

Source:CNBC

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Owen Li

Central Bank

Yen Set for Longest Losing Streak Since June on Bets BOJ to Hold_1

The Japanese currency extended losses on Friday, falling 0.6% to 153.48 per dollar, its lowest level since Nov. 26. It’s down a fifth day and is also headed for its worst week in more than two months.

Bloomberg reported earlier this week that BOJ policymakers see little cost in waiting until January or later to raise rates because there’s a limited risk that inflation might overshoot. They are open to a hike next week depending on economic data and market developments, the report said.

Money markets pared bets on a rate increase this month following the report, and now assign a 16% probability to that outcome. A week ago, the chance of a hike was 64%.

The BOJ’s quarterly Tankan report released on Friday showed confidence among Japan’s large firms remains upbeat, but the data didn’t move rates expectations.

“We think risks are tilted to a weaker yen,” said Adarsh Sinha, a FX and rates strategist at Bank of America. “The BOJ is in a wait-and-see mode as they assess future US economic policy.”