Written by Convera’s Market Insights team
Month-end flows weigh on USD
George Vessey – Lead FX Strategist
US dollar weakness extended on Wednesday without an obvious catalyst. November month-end flows and trimmed liquidity due to Thanksgiving might be exacerbating the weak dollar price action. But Treasury yields are also trending lower across the curve with benchmark 10-year rates down to 4.25%, the lower end of a trading range in place for over three weeks.
On the data front, all eyes were on the Federal Reserve’s (Fed) preferred measure of inflation – the PCE index, which was pretty much in line with expectations on both a headline and core basis. Income growth was substantially higher than expected though at 0.6% on the month, suggesting the drivers of solid spending growth remain intact. But dollar traders shrugged off the data and the dollar index recorded its biggest daily slump since early August.
FX markets have been more volatile this week on news driven by President-elect Donald Trump, so there’s probably some consolidation going on too. With the US market closure today and Friday, any further erratic price action in the major currencies should be treated mostly as noise.
Euro clocks best day since August
George Vessey – Lead FX Strategist
Yesterday, the euro scored its biggest daily rise against the USD since August thanks to broad-based dollar weakness and a shift in policy pricing. The French budget situation was back in the spotlight and plays into to a European story of low growth and higher yields that will weigh on the euro. However, the French 10-year yield premium retreated from a 12-year high after German yields rose following hawkish comments from the European Central Bank’s (ECB) Isabel Schnabel.
Early yesterday morning, the yield on 10-year French bonds versus German bonds rose to its widest since the euro-area debt crisis back in 2012. The jitters arose after President Emmanuel Macron reportedly remarked that Prime Minister Michel Barnier would be ousted soon by a no-confidence vote, while Barnier warned the country faces a “storm” in financial markets if his budget proposals are rejected and the government is voted out of power.
Nevertheless, there was no negative impact on the euro and instead, it got a boost from traders scaling back ECB rate cutting bets after Schnabel says there’s only limited room for further easing. Keeping afloat the $1.05 threshold will bode well for the euro in the short term, but looking ahead into 2025, we still think the risk of parity trading is high given rate and growth differentials and trade tariff risks.
Pound climbs out of oversold territory
George Vessey – Lead FX Strategist
It’s been a choppy week so far with opposing forces in motion. The bulk of the pound’s drivers have been external, with international news flow causing a seesaw of risk-on-risk off market conditions. Risk is on right now, meaning investors are willing to take on more risk, hence the strengthening of high beta currencies, equities and cryptocurrencies once again.
GBP/USD has staged a solid rebound from its 6-month low and is in the upper echelons of $1.26, dragging itself out of oversold territory and back into neutral according to the 14-day relative strength index. Largely due to the interest rate differentials, our model of GBP/USD points to $1.29 as being fair value, though it’s hard to calculate the risk premium of a global trade war, so any further tariff talk, hitting sentiment, would probably trigger a fresh leg lower for the pound. In the meantime though, weak seasonal trends for the buck and month-end flows pointing towards USD selling, suggests GBP/USD may extend closer towards its 50-week and 200-day moving averages nearer $1.28 in the very short term.
Against the euro, sterling is still grappling with the €1.20 handle, caught in a tight trading range of 1.3% for most of this month. Barring the fallout from the UK’s mini-Budget of 2022, the UK-German 2-year yield spread is hovering near its highest level since 2005, adding to the upside risk for GBP/EUR as money markets are pricing almost double the amount of rate cuts by the ECB compared to the BoE by this time next year.
EUR and GBP jump to top 20% of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 25-29
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.
