- Global markets mainly consolidated over the last week despite heightened geopolitical tensions and inflation releases that sparked some alarm about a resumption of price pressures.
- US equities mostly rebounded after a recent pullback while commodities were mostly higher on geopolitical worries. Safe haven Gold staged its best week since March 2023 and Bitcoin closed in on the $100k mark.
- Geopolitics returned to the fore after updates to Russia’s nuclear doctrine were followed up by news of a Ukrainian missile strike inside Russian territory. Russia has suggested the use of Western non-nuclear missiles by Ukraine against Russia may cause a nuclear response.
- Inflation releases from the UK and Canada were both above expectations causing concern around a broader resumption in global inflation that could be further fuelled by president-elect Donald Trump’s trade policies. The CAD rallied on the data but the GBP remained pressured.
- Next week, US personal consumption and expenditure, the Federal Reserve’s preferred measure of inflation is due, while the Reserve Bank of New Zealand looks likely to cut interest rates by another 50 basis points.
Global Macro
Inflation rebound to spook Fed?
Fed cuts less likely. Financial markets have rapidly repriced expectations for Federal Reserve rate cuts over the last two months. The market’s year-end target for 2025 climbed from 2.90% on 1 October to 3.90% currently – a rise of 100 basis points.
Trump trade, but not only. The so-called Trump trade has generated much of the move but it’s not the only driver. US data has been stronger and this has been reflected in Fed commentary. On 14 November, Fed chair Jerome Powell said: “The economy is not sending any signals that we need to be in a hurry to lower rates.” Powell also said: “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
Inflation picking up? Higher than expected inflation readings from Canada and the UK over the last week have raised the spectre of a pick-up in global inflation. US personal consumption and expenditure, the Fed’s favoured inflation measure, is due this coming Wednesday, and the headline number is forecast to rise from 2.1% in September to 2.3% in October. An unexpected rise in this price measure could extend the narrative of an unwelcome return in inflation.
Regional outlooks: US, UK, EZ
Macro divergence widens
US Slow but steady. It was a quiet week on the US macro front, but we did see jobless claims unexpectedly slow, although continuing claims accelerated to a 3-year high. Both the Leading Index and the Philadelphia Fed Business Outlook disappointed, however a recession indicator based on the Fed regional indexes continues to fall, alluding to the rising prospect of a soft or no landing scenario and keeping Fed easing bets in check. With the recent increase in geopolitical risk, we may see less resistance to a fresh leg higher for the US dollar.
UK A mixed bag. Annual headline CPI rose to 2.3% in October versus a forecast of 2.2% and 1.7% in September, pushed higher from electricity and gas prices increasing. It was also the largest monthly increase in headline inflation since October 2022. Core inflation rose more than expected to 3.3%, whist services inflation nudged back to 5%, although this was still in line with the BoE’s forecasts. A rate cut by the BoE in December is unlikely and the next 25 basis-point cut to be fully priced in is in March. Retail sales disappointed in October and are set for further declines as the recovery in consumer spending stalls, whilst PMIs also came in weaker than forecast. The UK economy saw a sustained drop in private sector employment amid weaker business optimism and rising cost inflation.
EZ PMIs sound alarm bell. German bond yields extended their drop after PMIs showed a surprise contraction for the services sector, posting the lowest reading since February. The composite figure nudged lower than expected while manufacturing PMIs were slightly higher, though also still in contractionary territory. Overall Eurozone PMI figures slumped deeper into contraction too – the composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the Eurozone. As a result, money markets have ramped up bets on ECB interest-rate cuts and the euro broke below key support to hit fresh 2-year lows.
Week ahead
Holiday-thinned trading week
Light calendar with focus on inflation. The economic calendar remains relatively quiet heading into the final week of November, with inflation readings taking center stage across major economies. Notable releases include US PCE on Wednesday, preliminary HICP figures from Spain and Germany on Thursday, followed by French and broader Eurozone flash inflation data on Friday. These readings will be crucial for gauging price pressures as major central banks maintain their vigilant stance.
Growth indicators in focus. Several key growth metrics are scheduled, with the US releasing its second reading of Q3 GDP on Wednesday. This will be complemented by durable goods orders, offering insights into business investment trends. Canada caps the week with its Q3 GDP report on Friday, while Sweden also releases its final Q3 GDP numbers the same day. The timing of these releases could provide important context for year-end market positioning.
Central bank decision. The Reserve Bank of New Zealand’s rate decision on Wednesday stands as the week’s sole major monetary policy event. With markets pricing in jumbo 50bps cut to 4.25%, any deviation from this consensus could trigger significant volatility in the New Zealand dollar and potentially influence broader Asian currency markets.
Holiday-thinned trading. Market participants should note that Thursday marks the US Thanksgiving holiday, with US markets closed. This traditionally results in reduced liquidity conditions globally, which could amplify price movements in currency pairs, particularly those involving the US dollar. Trading volumes typically remain lighter than usual on Friday as well, as many US participants extend their holiday break.
FX Views
Euro’s pain is dollar’s gain
USD Steam train rolls on. The US dollar index erased its early weekly losses to edge back towards two-year highs touched last week. The dollar’s rally over recent months has been linked to the revival of the Trump trade and upward implications for US yields via the likely shift in fiscal and monetary policy. But safe haven demand has also bolstered the buck amid heightened geopolitical risks. Looking forward, seasonal weakness in the dollar has been seen every December since 2017, with an average decline of 1.5%. This is largely due to holiday trade flows, a seasonal appetite for risk and account-closing into the year end. However, we’re conscious markets have yet to fully process the nuances of many of President-elect Donald Trump’s policies and investors will be keeping a close eye on news around his administration.
EUR Key support breaks. EUR/USD has dropped almost 4% since Trump was re-elected and over 7% since the end of September. The $1.05 handle, a key support level, has broken and short-dated moving averages are below longer-dated ones, a pattern that heralds further declines. Trump’s policy agenda and trade tariffs weigh. Political headaches in France and Germany don’t help either, nor the escalating war in Ukraine, nor the underwhelming Eurozone cyclical context and expected dovish ECB adjustment. Amidst the plethora of macro and political risks denting the euro’s appeal, traders continue to pay more and more for put options that bet on a lower EUR/USD than for calls that look for the pair to rise. Meanwhile, two-year rate differentials between Europe and the US are around 210 basis points, but back in 2018, when the trade war dominated, the rate differential reached 350 basis points and EUR/USD fell 15% from peak to trough during Trump’s first term. Thus, we see more room for euro weakness with a $1.05-$1.00 range in sight.
GBP Troubled by risk on risk off. Sterling surrendered all of its post-inflation gains versus the US dollar and more amidst wavering risk appetite. GBP/USD fell back into negative territory for the year and is down almost 3% month-to-date. The pair remains about three cents below its 5-year average, having been six cents above it less than two months ago. This is down to the Trump effect mainly. The pound isn’t benefiting from higher UK yields and the hawkish repricing of the BoE’s policy outlook and is thus undervalued versus the USD in our opinion. But the risk off tone in the wake of geopolitical tensions is another headwind for sterling, coupled with weak UK activity data of late. GBP/EUR, on the other hand, has reclaimed €1.20, and is up over 4% year-to-date and five cents above its 5-year average thanks to widening rate and growth differentials in favour of GBP. Looking forward, pound options traders are positioning for higher volatility going into next year though One-year implied volatility for GBP/USD trades at 8.19%, near a one-year high, as the gauge heads for its biggest monthly advance in two years. Looking at the implied-realised volatility spread, options are overpriced by around 170 basis points, the most since October 2022.
CHF Sweeping up haven flow. Renewed geopolitical risks spurred a bid for the safe haven franc this week. USD/CHF pulled back from a 3-month high, whilst EUR/CHF breached the historically important 0.93 handle. Moreover, demand for bullish Swiss franc options exposure picked up, even amid the risk the Swiss National Bank (SNB) goes ahead with a large interest-rate cut next month. One-month risk reversals, that capture the December policy meetings by major central banks show traders now favouring CHF upside. The adjustment suggests that the latest geopolitical turmoil has been enough to shift focus away from monetary policy when it comes to options positioning into year-end. The franc is already trading near cyclical peaks against the euro, but has the potential to extend those gains next year. While Switzerland will also be exposed to a trade war given its small, open economy, the Eurozone’s reliance on US trade is far greater. Still, an intervention risk by the SNB is always a consideration that may contain how much Swiss strength to expect.
CNY Yuan pressured as rates held. The PBOC maintained loan prime rates at 3.1% (1-year) and 3.6% (5-year) as expected, with market focus on property support measures and fiscal expansion rather than rate adjustments. Potential US tariff impacts could necessitate stronger policy support in 2025-26 to boost domestic demand. The technical outlook stays bullish after completing a head and shoulders bottom pattern, though price shows divergence from the upper Bollinger band with fading momentum, suggesting a correction phase. The pattern targets 7.3114, with key supports at 7.1846, 7.1475, and the neckline near 7.1500. Bullish view remains valid above 7.0869, with violation targeting 6.9719. Focus shifts to upcoming Chinese industrial profit data.
JPY Inflation beat lifts rate hopes. October’s core CPI surprised at 2.3% year-over-year excluding food and energy, exceeding forecasts and reinforcing expectations for potential BoJ policy adjustment in December. Robust inflation readings and central bank communication suggest increasing possibility of monetary policy normalization. Safe haven flows temporarily pushed the pair below 154.20 last week, breaking 153.80 support before touching 153.30, though price reversed sharply on improved risk sentiment. Cross-JPY upside appears limited amid persistent market uncertainties. Attention turns to key economic releases including Tokyo core CPI, unemployment rate, industrial production, retail sales, and housing starts, which could provide fresh impetus for potential policy shifts in the coming months. Near-term direction likely hinges on global risk sentiment and yield differentials.
CAD Turns at four-year highs. The Canadian dollar staged a recovery over the last week after a higher-than-expected reading in local inflation eased expectations for rapid rate cuts from the Bank of Canada. The October headline inflation reading jumped from 1.6% in September to 2.0% in October with the median and trimmed mean measures also above forecasts. The USD/CAD fell from four-year highs and moved back below the psychological 1.4000 handle. That said, markets still expect the BoC to cut rates by 25bps when the central bank next meets on 11 December. The USD/CAD fell back to short-term support at 1.3930 and a break below this level sets up a move to 1.3830. However, the USD/CAD remains in a medium-term uptrend. A quiet week on the data front sees Thursday’s current account numbers as the main release.
AUD RBA transmission in focus. The monetary policy transmission in Australia progresses similarly to other developed economies, despite the dominance of variable-rate mortgages. Domestic indicators present mixed signals, with improved consumer sentiment, potential consumption uptick, and resilient labor market supporting the RBA’s hawkish stance. Technically, the outlook has shifted bearish following a decisive break below 0.6500, with divergence from the lower bollinger band amid weakening downward momentum. The focus shifts to 0.6360 support, which has contained downside since November 2023, with 0.6268 as the next target if breached. Any corrective rebounds need to clear the 50-day EMA (0.66356) to challenge the bearish bias. Market attention centers on upcoming monthly CPI and housing credit data for fresh direction.
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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.
