- Markets are still all about the Trump trade. Republicans have secured a trifecta and are leading both the executive and legislative branches of the government. Hawkish appointees to the cabinet are adding a sense of “the calm before the storm”.
- The US dollar and bond yields across the curve rose for a seventh week in a row, cementing the idea of Trump’s pro-growth and tariff agenda being beneficial for the Greenback but inflationary for the real economy.
- Equity investors caught their breath and took some chips off the table as the rally of the S&P 500 extended to 25% year-to-date. The European benchmark continues to lag its US peers and is down 5% from its September high.
- US inflation came in as expected, having risen slightly in October. This won’t change the equation for the Fed, for now. December should be seen as tilted towards a rate cut with January more in the limbo.
- European economic data continues to underperform expectations. German investors see the growth outlook for 2025 as bleak, and think tanks are revising down their forecasts and the vote of confidence (Dec.) and new elections (Feb.) approach.
- Election related volatility has vanished and the VIX is approaching its post-pandemic low. The euro remains stuck below $1.06. The pound is trading at $1.2660.
- The political news flow will dominate next week as the PMIs are the only risk event on the global macro front able to potentially induce volatility into markets.
Global Macro
Fed to become sensitive to politics in 2025
More room for mistakes. Speculation about what Trump might do on the domestic policy and trade front are unlikely to be featured in the Fed’s December projections. It’s business as usual for Fed officials when it comes to the next meeting. Beyond that, prepare for monetary policy to be sensitive to the political news flow. The Fed has time on its side. The implementation of tax cuts and tariffs takes a while. However, one key difference to Trump’s first term: The US economy is now running above potential, raising the stakes and room for policy mistakes on the Fed’s part.
December cut our base case. Investors fearing that the rise of inflation would stop the Fed from cutting interest rates in December breathed a sigh of relief following the in-line CPI print. Headline inflation increased for the first time in six months, while the core figure stagnated. Both were in line with the consensus forecast and did not come as a surprise. Investors seem to tolerate the lack of progress on inflation for now. The October print has therefore not changed the reaction function of the Fed, which is still expected to cut interest rates by 25 basis points next month. January, however, is shaping up to be an open meeting.
Hawkish cabinet. It seems the early sense that US President-elect, Donald Trump, may be more pragmatic in power than on the campaign trail is being replaced by a more hawkish interpretation of his stance. Proposed tariffs and picks for key administration posts have begun to unnerve investors. European and Asian equities are underperforming, whilst the US dollar continues its onslaught – charging past 155 versus the yen and raising the risk that Japan will intervene to slow the depreciation.
Global Macro
Germany in crisis mode
German pessimism. While not an immediate threat, rising energy prices in Europe could be put on the list of potential risks going into the winter period. Gas prices surged to €44 per megawatt-hour, setting a record for the year. A cold weather front and falling storage capacity has pushed demand for protecting against further energy price rises higher. European assets continue to be dragged lower by political uncertainty from abroad and at home. The ZEW investor survey for November added pessimism to the already bleak picture as the current economic situation sub-index fell to the lowest level since the depth of the pandemic in early 2020. At -91.4 points, it is currently sitting at the fifth lowest level since 2005 and has been negative for 36 months, the second longest down streak on record.
Coalition breaks apart. The firing of German finance minister Christian Lindner by Chancellor Olaf Scholz has opened the door for a snap election early next year and has added another pressure point for the euro. The initial reaction of investors has been to sell German government bonds as the potential replacement of the fiscal hawk Lindner could be met with more bond issuance. However, the bigger issue is that growth expectations for 2025 will remain muted.
Bitcoin helped by Trump. Bitcoin has benefited from Donald Trump embracing the crypto space and the overall risk on rally over the past few months, rising by 107% from $42k to briefly touching $93k. A large part of the price increase seems to be a function of investors betting on Trump creating a national bitcoin reserve, which would increase the legitimacy of the currency and the demand for the asset. Betting markets place a one-in-three chance of such an event happening in the first three months of Trump’s presidency. Affirmative comments of the president-elect regarding such implementation would be needed to push Bitcoin beyond $100,000.
Week ahead
Time for investors to catch their breath
Beyond markets. Financial markets were still all about the Trump trade this week. However, equities are seeing some exhaustion of momentum right now with stock indices catching their breath and investors taking some chips of the table so to speak. Most of the information that we currently have seems to be priced in. The next step is watching out for the appointees of the new administration but also gauging which policies are likely to be implemented under Trump. This non-data driven news flows will continue to be important.
One singular risk event. On the macro front, it will mostly be a quiet week. Some second-tier releases in the US and final inflation figures in Europe should not be a threat to the status quo. The only potential volatility catalyst comes on Friday in the form of the purchasing manager indices, that are being released across the world. The European composite is sitting right on the mark separating expansion from contraction (50). The continent has continued to underperform the US and UK as the German growth outlook remains subdued and political worries start to build.
Testing hawkish BoE. With the Bank of England still seen as the least dovish of the G3 central banks, the UK inflation report and retail sales data will also be closely scrutinized. Services inflation remains a key hurdle for the BoE to overcome, but with consumer spending stalling and GDP growth surprising lower, there’s scope for a dovish recalibration of BoE rate expectations, which poses further downside risks to the pound.
FX Views
US exceptionalism turbocharges dollar
USD Reaching for the skies. The US dollar extended its gains, diverging with US yields, to reach a fresh one-year high against a basket of currencies. The dollar index has risen around 7% over seven weeks, its strongest run over such a timespan since 2022. Options trading and the latest positioning data suggest traders are betting on further gains in the US currency, with bullish sentiment on the dollar over the next year the strongest since early July. The dollar’s acceleration arose after Trump’s hawkish cabinet picks and the Republicans keeping control of the House, delivering Trump a trifecta. Economic momentum had already shifted back in favour of the US, motivating yet another hawkish repricing of the Fed’s cutting cycle , which is dollar positive, both via tariff and fiscal-monetary policy mix channels. Though Trump’s policies and expectations for sustained US growth into 2025 should further overwhelm seasonal dollar weakness into year end, uncertainty remains high, and the key takeaway is that it is now all about the scale and speed of policy shift.
EUR A long list of tail risks. The bearish narrative surrounding the euro doesn’t seem to go away as the currency broke decisively below the important $1.06 mark against the US dollar. EUR/USD is hovering near 1-year lows as traders gauge how much downside potential remains. The common currency has shed almost 6% of its value since the end of September, when markets started aggressively pricing in a Trump presidency. This has pushed EUR/USD into negative territory on the year. If this trend continues into the end of December, it would be the fifth out of the last seven years that the euro fell against the dollar. With less than two months to go, FX investors will look out for seasonality effects, the composition of Trump’s administration and the result of the vote of confidence in Germany to gauge how likely EUR/USD is to trade at parity.
GBP Reality check as trapdoor opens. The pound is on track for its worst weekly streak since 2014 against the US dollar. GBP/USD has tumbled for seven weeks on the trot, amounting to a fall of over 5%, but this has been the worst week of the year. Since taking out its key long-term moving averages near $1.28, the slide accelerated below the $1.27 handle, with the 100-week moving average, located at $1.26, the next downside target. The pound may struggle to recover against the dollar despite the RSI flashing oversold, and rate/yield spreads signaling undervaluation. Sterling is also more vulnerable to US data releases than its own, and the US exceptionalism narrative is ballooning. Another risk to GBP remains BoE policy and whether the UK central bank remains as hawkish as it is. Elsewhere, the pound is clutching onto the €1.20 mark versus the euro after clipping an over 2-year high at €1.21 this week. Rate differentials favour sterling, with UK-German yield spreads at multi-year highs, but the UK is also less exposed to direct tariff risks than the Eurozone given its trade deficit in goods with the US. As such, this arguably opens up a positive tailwind for GBP/EUR going into 2025.
CHF Diverging paths. The franc has declined almost 6% against the dollar since the end of September, suffering the consequences of turbocharged Trump trades. USD/CHF has punched through its 200-day moving average for the first time since July, but has bumped into resistance at its 100-week MA at 0.89. Despite climbing into overbought territory, further upside into year-end is feasible amidst bullish USD momentum, especially given widening rate differentials as markets expect the SNB to cut rates a further three more times by next summer. Meanwhile, EUR/CHF remains paralyzed around the 0.9370, but with more ECB easing expected versus the SNB next year, compressing EUR/CHF interest rate differentials, the path of least resistance appears lower for this pair. Because of these diverging paths, whilst the franc may be strong versus the euro, weakness against the dollar will limit the upside of the trade-weighted CHF and likely prevent any meaningful FX intervention by the SNB.
CNY PBoC flexes control with strong Yuan fix. The People’s Bank of China demonstrated firm control over yuan depreciation through a stronger-than-expected daily fix at 7.1966, defying market expectations of 7.2325. This intervention, marked by significant countercyclical factor adjustments of 350-450 pips, clearly signals authorities’ resistance to rapid currency weakening. The move comes amid persistent dollar strength following US CPI data and growing concerns over US-China relations. Rising pressure on CNH last week reflects market uncertainty about policy implications and economic recovery prospects. USD/CNY is primed for bullish price action with 50-day EMA likely crossing 200-day EMA soon. Next key resistance level at 7.2773 (Year-To-Date high). Key focus remains on upcoming FDI data and the 5-year loan prime rate decision, which could provide further direction for the currency.
JPY Post-quake recovery lifts regional outlook. The Bank of Japan’s Kanazawa branch upgraded its economic assessment to “gradual recovery” for the Hokuriku region, marking the first upward revision in two months despite ongoing Noto Peninsula earthquake impacts. The report highlighted increasing public investment in reconstruction projects and rising tourism-driven consumption. While employment availability remains high, earthquake effects continue to influence local operations and population movements. USD/JPY shows signs of exhaustion in its September-November rally, with key support between 150.335-151.68. The post-election whipsaw has generated a momentum divergence sell signal, suggesting potential consolidation ahead. Chart shows strong correlation between Yen and Fed pricing curve, which explains the strength in USD/JPY pair. Watch for national CPI, trade balance, and manufacturing PMI data.
CAD Greenback strength, commodity weakness hits Loonie. The Canadian dollar has been hit hard post the US election as an expected widening of policy divergence between the US and Canada pushed the USD/CAD higher. The USD/CAD pushed through the key 1.4000 level for the first time since the depths of the pandemic in mid-2020. The Canadian dollar’s underperformance has also been driven by the sharp fall seen in commodities this month. So far in November, gold is down 6.0%, iron ore is down 4.0% while crude oil is flat, but broadly near 15-month lows. The stronger US dollar is one driver of this commodity weakness, but concerns around how trade tensions between the US and China might impact Chinese growth has also contributed to the weakness in the commodity space. Further losses could be negative for commodity currencies like the CAD. Looking forward, Canadian inflation, due on Tuesday, will be the upcoming week’s main release.
AUD Wage growth cools, signaling inflation ease. The Australian wage price index (WPI) showed signs of moderation, rising 3.5% YoY in Q3, below the expected 3.6%. Private sector wages maintained a 0.8% quarterly growth but yearly growth fell to 3.5%, while public sector wages slightly decreased to 0.8% q/q and 3.7% y/y. The data suggests easing inflationary pressures, with labor costs falling to a 2-year low of 5.5% annualized. However, the RBA remains concerned about underlying inflation, particularly given low productivity levels. AUD/USD shows potential for a short-term bottom near 0.6476, with initial resistance at 0.6677. The market appears to be forming a bottom pattern beneath this level in the coming weeks, with key focus on MI leading index and total reserve assets.
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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.
