Written by Convera’s Market Insights team
Dollar might defy seasonal trend again
George Vessey – Lead FX Strategist
FX markets have been more volatile this week on international news and US tariff threats to nearby nations. The dollar faced pressure earlier this week following the nomination of Scott Bessent as US Treasury Secretary, which provided a sense of stability to markets and reduced expectations for aggressive tariff policies under incoming President Trump. But, month-end rebalancing flows and low liquidity due to Thanksgiving have likely exacerbated the weak dollar price action.
In fact, the US dollar index is on track for its biggest weekly decline since August alongside short-dated US yields primed to record their first weekly fall in five. Looking forward, some possible mild headwinds exist including an unwind of safe haven flows given the ceasefire news from the Middle East and the potential for some softer US macro data next week building back expectations of a 25bp Fed rate cut in December, up from under 50% to 60% this week.
We also note weak USD seasonal trends in December, although conviction is low this year because the trend was bucked when Trump was elected in 2016. Either way, we think the dollar outlook remains bullish going into 2025, driven by the robust US economic cycle, hawkish Fed repricing and looming import tariffs. Beware the contrarian trade though – the broad consensus is that dollar strength holds into 2025 – the market has a habit of wrong-footing the consensus.
Face-off between hawks and doves
George Vessey – Lead FX Strategist
The euro’s recovery has extended this morning with EUR/USD hovering below the $1.06 handle, thanks to more month-end dollar selling. On the macro front, the inflation readings from the German states were a touch lower than expected but overall German headline inflation came in at 2.2% y/y, up from 2.0%. However, Spanish inflation data reinforced expectations for continued European Central Bank (ECB) interest-rate cuts.
In contrast to the hawkish remarks by ECB officials earlier this week, French central bank governor Francois Villeroy De Galhau said that he wouldn’t exclude rates falling below neutral. This caused European bond yields to slide along with the euro. Traders are pricing in around 30 basis points of easing for the December meeting, slightly up from the day prior, but still below 40bps that were priced in last week. It looks like a jumbo hike next month by the ECB is slowly being priced out, but the bigger question is how far the ECB will eventually go with rate cuts.
Currently, the market expects double the amount of rate cuts by the ECB compared to the Fed in 2025. This divergence in monetary policy should keep euro bulls at bay and EUR/USD trading below $1.10. Indeed, the net short positioning of speculators in the euro versus the dollar has room to rise much further, especially given the growing risk premium amid the political drama in France and Germany.
What next for sterling-euro?
George Vessey – Lead FX Strategist
The GBP/EUR bullish case isn’t just a Trump trade but linked to widening interest rate differentials in favour of sterling. The currency pair is once again extending above €1.20 after trading in a narrow 2% range during November – well below its 10-year monthly average range of 3%.
The exchange rate has traded within a narrow band all year in fact – of just 5.5% – its joint second smallest range in over a decade. The pound sits comfortably in the top 20% of its year-to-date range and around five cents above its 5-year average. on the political front, despite the backlash the UK’s government has faced since coming into power this year, investors view the UK political climate as much more stable relative to its European peers, which adds to sterling’s positive narrative. Beyond more stable politics, sterling’s G10 FX outperformance mostly came from the UK economy beating consensus from the start of 2024, although the UK-Eurozone economic surprise differential has been on a downtrend since the summer.
Nevertheless, the UK is still outperforming most of Europe, and with inflation picking up again, the Bank of England is more than likely to keep rates much higher than the ECB, providing the pound an attractive yield appeal too. Moreover, the Eurozone economy is more exposed than the UK to US tariff policies, given their stages in economic cycles and trade structure. Bottom line – we wouldn’t be surprised to see fresh highs above €1.21 trade in the coming months.
GBP/USD up 1.5% to 1-week high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 25-29
All times are in GMT
Have a question? [email protected]
*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.
