Written by Convera’s Market Insights team
Dovish tunes keep December cut alive
Boris Kovacevic – Global Macro Strategist
The US dollar danced to the tune of dovish Fed speak in yesterday’s session, disregarding two strong macro upside surprises. The currency is still positive on the week due to the strong start on Monday but has given up some of its earlier gains yesterday. Equity markets retraced from record highs as investors piled back into government bonds. The 2-year Treasury yield fell for the sixth time in seven days to 4.15%, the lowest level since early November.
After comments from Waller and Williams on Monday, Goolsbee and Kugler joined the chorus of slightly dovish Fed officials open to cut rates in December. The strong economic backdrop has not deterred policy makers from continuing to ease policy. Easing bets for the next meeting remained somewhat unchanged at 74%. It seems that the macro and policy side cancelled each other out when it comes to market pricing.
In macro land, US job openings picked up again in October from 7.37 to 7.74 million. The reading was well above consensus and the strongest advance in more than a year. This will shine the spotlight on the upcoming labor market data such as the employment sub-index from the ISM services report, the ADP private employment report, and the non-farm payrolls release at the end of the week.
On another note, the Korean won recovered almost all its politically-induced losses yesterday, following the imposition and almost immediate recall of martial law by the president. The opposition party is now calling on the head of state to resign. Such risk events are strengthening our thesis that politically-induced idiosyncratic currency volatility is here to stay. Going into 2025, disputes between countries on the trade front and rising tariffs should keep demand for options hedging elevated.
Waiting for impetus
Boris Kovacevic – Global Macro Strategist
European investors attention continues to be focused solely on France as the government faces a no-confidence vote on Wednesday. President Emmanuel Macron has called on lawmakers to put aside differences to keep the current government in power. However, demand for hedging short-term euro downside risks seems to imply that that is unlikely to happen. EUR/USD option volatility is the highest since March 2023 as macro hedge funds attempt to profit from the global political uncertainty.
Economic data out of Europe is scarce this week, which is pushing politics and US macro into the spotlight. Yesterday’s rise above the important $1.05 mark could give the currency pair impetus for an advance to $1.0560 should Fed Chair Jerome Powell lean into dovish comments from his peers later today. However, moves beyond $1.06 would need to come with either 1) the French government surviving the no-confidence vote or 2) the US jobs report on Friday disappointing expectations by a large margin. Otherwise, the range between $1.0460 – $1.0560 will be sustained.
Sterling showing resilience
George Vessey – Lead FX Strategist
The British pound climbed modestly against the US dollar yesterday and has extended its gains towards $1.27 this morning despite global political risks clouding the broader outlook for currency markets. The risk-sensitive pound usually weakens in such an environment, though its correlation with risk measures, such as equities and the VIX index, has weakened or reversed over the last month.
Although GBP/USD has failed to decisively clear the $1.27 handle and is still down slightly month-to-date, it’s held up relatively well in the face of recent political upheaval. One bullish factor likely helping the pound is the monetary policy outlook. The Bank of England remains the least dovish of the G3 central banks, with the odds of a rate cut this month just 10% and only three 25-basis point cuts priced in by this time next year. This is similar to the Fed, but half the amount expected by the ECB – hence GBP/EUR is edging closer to €1.21 – a level it’s only been above for 1% of the time since the Brexit vote of 2016.
Looking ahead, we expect further gains for GBP/EUR given relative growth and yield differentials favouring the pound, not to mention the political instability hanging over Europe. As for GBP/USD, a breach of the $1.26 support level will expose $1.25 as it did two weeks ago, followed by the year-to-date low of $1.23. Conversely, if buyers successfully reclaim $1.27, they could test the 200-day moving average at $1.2818. The direction will likely be determined by US macro news and Fed speakers though.
Sterling topping high-beta peers lately
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: December 2-6
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
