The Morning Update

The USD weakened, oil prices strengthened, equity markets rallied, and US yields eased on rate pivot hopes. The USD tumbled to a four-month low, US 10-year yields dropped below 4%, while European equities rallied nearly 2% as risk-on sentiment surged as investors increased bets on rate cuts by the Fed, ECB, and the BoE in 2024. On Wednesday the Fed kept interest rates on hold and set the table for up to three interest rate cuts in 2024, this is less than markets had hoped, but more aggressive than officials had previously indicated. Investors are now focusing on the BoE and ECB interest rate decisions today with both central banks expected to follow the Fed's lead expressing their easing strategy into 2024 in their statements. Elsewhere, the Norwegian Central Bank surprised markets after it unexpectedly raised interest rates to 4.5%. Oil prices advanced from a 5-month low on improving demand signals and the prospect of US rate cuts. Other economic events that will be in focus today, are US Initial Jobless Claims, Retail Sales, and lower-tier CAD Manufacturing Sales to help provide intraday direction to currency markets today.

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In other news. Top defense officials from the US and China meet after the Taiwan rift. Argentina's left vows resistance as Javier Milei sets out sharp budget cuts. The EU unblocks Euro 10 bn for Hungary ahead of Ukraine summit. The US House votes to approve impeachment inquiry into Biden. The IEA raises the 2024 oil demand growth forecast despite the economic gloom. Canada's debt service costs hit a record high on interest rate hikes. Scotiabank to focus on North America in strategy makeover. BoE should be cautious about cuts, two former officials say.

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In currency markets. The USD index hits a fresh 4-month low as the Fed signals 2024 rate cuts. The Norwegian Crown strengthened after a surprise interest rate hike from its central bank. Swiss Franc holds steady after its central bank kept interest rates on hold. CNY hits a two-week high after the Fed flags monetary easing in 2024. CNY rallied 0.5%, while Asian currencies gained 0.3% on average vs USD. Trading currencies extended gains with CHF up by 0.1%, NZD, SEK & ZAR firmed by 0.6%, AUD gained 0.8%, JPY strengthened by 0.9%, and NOK rallied by 2%, while outlier MXN fell 0.2% vs USD.

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In commodity markets. Oil prices gained by 2%, Natural Gas and Wheat prices strengthened by 0.8%, Gold and Copper prices rallied by 2.6%, and Silver prices surged by 5.8%, while Soybean prices slipped by 0.2%.

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CAD extends its rally as risk-on sentiment rebounds, helping commodity prices rally and strengthening the loonie after the Federal Reserve signaled the prospect of three interest rate cuts into 2024. CAD rallied to a fresh three-month high, up nearly 1% for December, and it's now sitting up 0.75% in 2023 vs the USD. With no key CAD data releases today, the CAD will remain at the mercy of the US data releases to help provide intraday direction. The next key support to focus on is 1.3378 the low seen Sept 19th.

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EURCAD slips as caution remains ahead of the ECB interest rate decision, and as rallying commodity prices help provide additional support to loonie. Month to date the loonie is up 0.6% vs Euro.

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EUR clings to gains above 1.0900 heading into the ECB interest rate announcement. The Euro holds on to its gains after the Fed's interest rate pivot announcement yesterday and is buoyed by surging risk-on sentiment. The ECB is widely anticipated to keep interest rates on hold today, but the Euro direction hinges on the ECB's policy outlook for 2024. The euro is vulnerable to increased volatility depending on whether Lagarde reiterates it is too early to talk about a policy pivot or the Euro could weaken if Lagarde signals they might soon start talking about the appropriate timing of a rate cut.

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GBPEUR holds steady as both currencies are sidelined ahead of both of their respective central banks' rate decisions and statements.

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GBP stalls near 1.2650 as investors eye the BoE policy decision. The pound holds near a 10-day high, benefiting from the Fed's dovish statement after it signaled a pivot on interest rates in 2024. The BoE is expected to leave the key interest rate unchanged at 5.25%. In November the BoE stated that risks to inflation projections were still skewed to the upside. If the BoE maintains its previous stance on interest rates, the pound could extend rallying vs both the USD and EUR into 2024. All focus will be on BoE Governor Bailey's comments at 7 am EST today.