Fundamental
Overview

The Russell 2000 yesterday
sold off aggressively following the FOMC decision as the market perceived it as more
hawkish than expected.

Overall, apart from some
slight tweaks, the Fed was in line with the market’s expectations, and the
selloff might have been an overreaction. There’s lots of noise during such big
events, so be careful of that.

The data is what really
matters now as it will decide what the Fed is going to do. It will likely take
just one soft CPI report in January to see the market reacting in a dovish way
and print new all-time highs.

For now, the conditions for
further upside remain in place. In fact, Trump’s policies should be a positive
driver for growth in 2025 and with the Fed remaining in an easing cycle, growth
should remain positive and might even accelerate as seen already recently by
the Atlanta Fed GDPNow indicator.

The risk in 2025 is of
course inflation and the Fed’s reaction function. Right now, the Fed’s reaction
function is that a strong economy would warrant a slower pace in the easing
cycle and not a tightening. That should still be supportive for the stock market.

If the Fed’s reaction
function were to change to a potential tightening, then that will likely
trigger a big correction in the stock market (if not even a bear market given
the stretched valuations) on expected economic slowdown. For now, we remain in
a “buy the dip” environment.

Russell 2000
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that the Russell 2000 broke below the 2290 support following the FOMC decision. The sellers will
likely pile in around these levels with a defined risk above the 2290 level to
extend the drop into the major trendline. The buyers, on the other hand,
will want to see the price rising back above the 2290 level to start targeting
new highs.

Russell 2000 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see more clearly the support turned resistance around the 2290 level where we
have also the 38.2% Fibonacci retracement level for confluence. That’s where we can expect the
sellers to step in to extend the drop into new lows, while the buyers will look
for a break higher to target a rally back into the all-time highs.

Russell 2000 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a minor upward trendline defining the current pullback into
the resistance. The buyers will likely keep on leaning on it to push into new
highs, while the sellers will look for a break lower to position for new lows. The
red lines define the average daily range for today.

Upcoming
Catalysts

Today we get the latest US jobless claims figures, while tomorrow we conclude
the week with the US PCE data.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• Don’t see persistent economic stagnation, inflation undershooting
• A 50 bps move would require projections showing persistent undershooting of inflation
• Don’t see a situation where rates would need to fall below neutral
• Euro weakness not creating inflationary pressures

The message has been consistent across the board from the ECB since last week. So, this just adds to that.

This article was written by Justin Low at www.forexlive.com.

Rate cuts by year-end

• Fed 2025: 36 bps (92% probability of no change at the upcoming meeting)
• ECB 2025: 110 bps (93% probability of rate cut at the upcoming meeting)
• BoE 2025: 47 bps (50% probability of rate cut at the upcoming meeting)
• BoC 2025: 49 bps (50% probability of rate cut at the upcoming meeting)
• RBA 2025: 67 bps (60% probability of rate cut at the upcoming meeting)
• RBNZ 2025: 118 bps (88% probability of 50 bps rate cut at the upcoming meeting)
• SNB 2025: 48 bps (84% probability of 25 bps rate cut at the upcoming meeting)

Rate hikes by year-end

• BoJ 2025: 43 bps (50% probability of no change at the upcoming meeting)

*where you see 25 bps rate cut, the rest of the probability is for a 50 bps cut

This article was written by Giuseppe Dellamotta at www.forexlive.com.

On the bank rate vote, here’s what the calls are:

• Barclays: 8-1 vote for a hold but minor possibility it could be as much as 6-3
• BofA: 8-1 vote for a hold with risks for a 9-0
• Deustche: 9-0 vote for a hold
• Goldman Sachs: 8-1 vote for a hold
• HSBC: 8-1 vote for a hold
• JP Morgan: 8-1 vote for a hold
• Morgan Stanley: 8-1 vote for a hold
• Nomura: 8-1 vote for a hold

Besides Barclays‘ outside call, there is more or less a general consensus expecting a 8-1 vote with Dhingra set to be the only policymaker to dissent in favour of a rate cut.

As for the central bank’s guidance, there is also a consensus is expecting the „gradual“ approach to be maintained. In essence, the language will mostly be the same as per what we saw in November here.

But amid recent developments in the UK economy, the calls for next year are differing. While most are anticipating quarterly rate cuts at the moment, there are a few standouts.

Barclays is seeing that the BOE might have to readjust their pacing and „move to sequential 25bp moves in May, June, August and September, leaving the bank rate at
3.50%.. we think a majority of the committee will see this as consistent with policy being
neutral“.

Meanwhile, Deutsche sees the BOE taking it slow in the first half of next year before accelerating the pace in the second half of the year. The firm sees „three rate cuts in 2H 2025, taking
place in August, November and December.. The bank rate settling at 3.25% in Q1-26 –
broadly consistent with our view of medium-term r-star“.

As for HSBC, the firm sees rate cuts in February, May, August, September, November and December 2025
with a final cut to 3.00% in February 2026.

(h/t @ MNI – Market News)

This article was written by Justin Low at www.forexlive.com.

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This article was written by FL Contributors at www.forexlive.com.