A Look at the Day Ahead in European and Global Markets

By Tom Westbrook

The Bank of Japan left interest rates on hold, as expected, clearing the way for traders to sell the yen, which fell to a one-month low against the dollar. Focus now shifts to the Bank of England's decision later today.

A cautious outlook from the Federal Reserve has already caused stocks to tumble and the dollar to soar, forcing investors to confront various risks, including inflation, tied to the unpredictable U.S. administration as President-elect Donald Trump prepares to take office.

Sterling May Be Ruffled Next

Britain's currency has seen support due to relatively hawkish market expectations regarding BoE policy. Its 1% decline for the year so far is the smallest among any G10 currency against the dollar.

Following hot UK wages data released earlier in the week, markets expect rates to remain on hold at 4.75%. Fifty basis points of rate cuts are anticipated by 2025, with the first 25 basis point cut fully priced in for May. This outlook could shift if policymakers display particularly hawkish tendencies.

On Wednesday, the Fed cut interest rates by a quarter of a percentage point, as anticipated, but indicated a slower pace of future easing.

Fed officials revised their median projection for the long-run neutral rate and significantly increased their inflation outlook for 2025, continuing to outline a pathway for additional rate cuts in the coming year.

The dollar extended its gains in Asia, pushing South Korea's won to a 15-year low, and stocks fell.

Data from New Zealand indicated that the economy fell into recession in the third quarter, reinforcing the case for more aggressive rate cuts and leading the kiwi to hit a two-year low.

Thursday also brings central bank meetings in Norway and Sweden. In contrast to other western central banks, Norway's central bank is likely to maintain interest rates at their highest level since 2008 due to robust economic growth, above-target inflation, and a weak local currency.

Sweden's central bank is expected to reduce its key rate by a quarter point, with potential for further easing early next year if inflation remains managed, according to a Reuters poll of economists.

Key Developments That Could Influence Markets on Thursday:

• Central bank decisions in Britain, Norway, and Sweden.

(By Tom Westbrook; Editing by Edmund Klamann)