Written by Convera’s Market Insights team
Risk-on risk-off
George Vessey – Lead FX Strategist
FX traders ramped up expectations for a Federal Reserve (Fed) rate cut this month to 86% after a mixed employment report on Friday. November’s US inflation data on Wednesday is the next key data point, with Fed speakers in a blackout period before the central bank’s meeting a week tomorrow. The US dollar has slipped lower with US yields, though geopolitical risks are limiting the buck’s decline as markets oscillate between risk-on and risk-off amidst news from China.
Despite the recent loss of momentum for the US dollar (down almost 2% since November peaks) in the wake of investors gaining more conviction on future Fed rate cuts, the US currency remains a popular refuge in times of heightened geopolitical tensions and uncertainty. So, while China’s biggest shift to looser monetary policy in over a decade helped boost risk assets, China’s escalating trade conflict with the US is keeping risk appetite at bay. China has announced to cut off key supplies of drones to the US and Europe that have been vital to Ukraine’s defence against Russia. The acceleration of geopolitical event risks, coupled with tariffs and protectionism, is likely to keep FX volatility elevated, but focus is also on the macroeconomic and monetary policy outlook.
Although the dollar and short-dated yields haven’t moved as in sync since the US election, they’ve still never been positively correlated for so long. That bodes ill for the dollar should yields get dragged by a rebuilding of rate-cut bets over the next year.
More stimulus from China
Boris Kovacevic – Global Macro Strategist
The euro is trading back well above the $1.05 mark and has distanced itself from its yearly low it traded at the end of November around $1.0330. The news flow out of Europe continues to be a drag on the currency with political uncertainty hanging over the euro’s head and the macro data falling short of expectations last week.
The rebound can be seen purely as a function of US developments. A peaking surprise index, bond yields, and Fed expectations have led to a slight repricing of the dollar lower. EUR/USD benefited from this development. A potential catalyst for a continued recovery lies in China.
Beijing vowed to ramp up stimulus measures to spur growth in 2025. A more proactive fiscal policy and moderately loose monetary policy should do the trick. This should also counteract any negative spillover effects from Trump’s increase in tariffs. Investors hope for more positive news at the Central Economic Work Conference on Wednesday. Chinese equity benchmarks jumped by around 3%, while the rally in European assets faded during yesterday’s session.
Key resistance barrier for sterling
George Vessey – Lead FX Strategist
The pound strengthened alongside other risk-sensitive currencies at the start of the week after an easing in China’s monetary policy stance. Sterling shrugged off some gloomy UK labour market surveys and instead rode the global risk wave. GBP/USD climbing back towards $1.28 and GBP/EUR towards €1.21.
The labour market surveys revealed the number of UK job vacancies in November fell at the fastest rate since August 2020. Businesses are having to weigh up the prospect of increasing employee costs following the UK Budget. Business confidence also slumped to its lowest level in almost two years, according to accountancy company BDO. The slowdown in the jobs market, coupled with an increasing number of candidates, could put more downward pressure on wage inflation. This will please the Bank of England (BoE), but could prompt more easing than currently priced in by markets for 2025, which could hurt the pound. Sterling remains supported by relatively higher yields than most of its G10 peers, but a dovish repricing of BoE policy expectations could weigh on the UK currency.
The 200-day moving average for GBP/USD is located at $1.2819, a level that provided resistance to Friday’s attempted bounce after the US jobs report. A break above it would be an important technical development that favours further upside for the pound and could see GBP/EUR extend beyond €1.21 at the same time.
Aussie crumbles after dovish RBA
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: December 9-13
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.
