On December 15, economists predicted that the European Central Bank's next move on interest rates would be a hike, aligning with market expectations and the views of influential Executive Board member Isabel Schnabel, as inflation stabilizes around 2%. In a survey, over 60% of respondents indicated that officials were more likely to raise rather than lower borrowing costs—a significant shift from October, when only one-third held this view. However, they do not expect this to happen soon, forecasting the deposit rate to remain at 2% on December 18 and over the next two years. Analysts are revising their projections as inflation stabilizes and the eurozone economy outperforms expectations despite global trade tensions and geopolitical turbulence. Schnabel cited this resilience—along with brighter prospects fueled by substantial government spending—as one reason she feels "fairly comfortable" with market bets favoring a rate hike. One indicator suggests the first hike may occur in the second half of 2027.
Meanwhile, the UK's October GDP unexpectedly contracted by 0.1%, coupled with a decline in inflation expectations from a two-year high, strengthening the case for the Bank of England to restart its rate-cutting cycle next week. Weak growth data and easing price pressures have pushed market expectations for a rate cut to 90%. Data from the UK Office for National Statistics showed GDP fell 0.1% month-on-month in October, missing Reuters economists' forecast of 0.1% growth. This marks a return to contraction after seven months of expansion, with analysts attributing the slowdown to uncertainty surrounding Rachel Reeves' tax-heavy budget proposal. Additionally, the BoE's latest survey revealed households' one-year inflation expectations dropped to 3.5% from 3.6% in August, while five-year expectations eased 0.1 percentage points to 3.7%, giving the Monetary Policy Committee more room for easing.
Key data to watch today include the US December New York Fed Manufacturing Index, Canada's November unadjusted CPI annual rate, and October manufacturing sales month-on-month.
**USD Index** The USD Index consolidated with a slight gain on Friday, currently trading near 98.50. Short-covering and optimistic remarks from Fed officials provided support, though the central bank's recent less hawkish-than-expected rate decision capped upside momentum. Resistance is eyed at 99.00, with support at 98.00.
**EUR/USD** The euro dipped marginally on Friday, hovering around 1.1730, pressured by profit-taking and a stabilizing USD. However, in-line German CPI data and expectations of an ECB hold in December limited losses. Resistance lies at 1.1800, support at 1.1650.
**GBP/USD** Sterling edged lower on Friday, trading near 1.3360, weighed by profit-taking, a firmer USD, and weak UK GDP figures. Resistance is seen at 1.3450, support at 1.3250.
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