- The mixed labor market data path from the United States has seemingly not had too much of an impact on financials and FX. Global equity markets will stage a third consecutive weekly rise, while the US dollar treads water at elevated levels.
- This week was all about the US labor market. However, the picture did not get any clearer on where employment is headed. The ISM PMI surveys, ADP employment report, initial jobless claims disappointed but job openings rose significantly.
- The US dollar took its signals from Fed speakers continuing to cautiously promote the idea of ending the year with a 25-basis point cut in December. Markets place a 70% probability on that scenario.
- The French government collapsed this week as the Prime Minister Michel Barnier was ousted in a no-confidence vote. The two largest economies on the continent are now in political limbo and unable to enact much-needed legislation.
- Economic data was far and between in Europe. However, the macro figures we did get seem to confirm the continued pessimism towards the continent. German industrial production fell more than expected in October, decreasing by 1% m/m.
- The dollar turned positive on the week before the open of US markets on Friday. The labor market report will decide if the Greenback can keep its gains into the weekend.
- Next week will be about US inflation and rate cuts from the ECB, SNB, and BoC.
Global Macro
Fed still leaning towards a cut
Divergence. Global equity markets continued their ascent after both European and US benchmarks appreciated for a third consecutive week. Expectations of easier monetary policy and Trump’s pro growth policy agenda have given stock markets new impetus since November. The S&P 500 has now gained around 27% since the beginning of the year, compared to 8.5% and -2.3% for the STOXX 600 and CAC 40. French markets underperformed once again as the government did not survive the no-confidence vote.
Mixed macro. A mixed US data batch and flurry of Fed speakers left the US dollar index lacking directional impetus this week. The ADP jobs data didn’t move the buck as the November figure was near enough expectations. The ISM services print dropped sharply though, dragging yields and the dollar from their highs. However, job openings picked up again in October from 7.37 to 7.74 million. The reading was well above consensus and the strongest advance in more than a year.
Clear Fed speak. In the end, it was dovish Fed speak that left the dollar weaker on the week. Jerome Powell continued to describe the economy as strong but from his colleagues’ speeches, it became clear that policy easing before year end is still the preferred option. The strong economic backdrop has not deterred policy makers from continuing to ease policy. Easing bets for the next meeting remained somewhat unchanged at 70%.
Cautious BoE. The November Decision Maker Panel shows rising general inflation expectations in the UK, firms boosting their own planned price growth and stubbornly strong wage gains. This is a notable turn from the downtrend in those indicators in the past 18 months and thus the Bank of England (BoE) can afford to cut interest rates only gradually given these signals of continued inflation persistence.
Weekly focus
Geopolitics matters again
The Korean won recovered almost all its politically induced losses yesterday, following the imposition and almost immediate recall of martial law by the president. The opposition party is now calling on the head of state to resign. However, such risk events are strengthening our thesis that politically induced idiosyncratic & broad currency volatility is here to stay. Going into 2025, disputes between countries on the trade front and conflicts in regard to diverging industrial policy should keep demand for FX hedging elevated. Geopolitics is now cited by 42% of surveyed market participants in the United Kingdom as the number one source of risk to the domestic financial system, topping both inflation, macro, and cyber security concerns. This extends to the firm level as well as geopolitical concern within companies have reached the highest level since the Bank of England survey began in 2008.
The calm geopolitical waters in which international companies have been able to maneuver carelessly over the past few decades seem to be getting more volatile. Around 2000 industrial policies have been implemented every year since 2021. Most of them highly trade distorting and heavily centered around North America, Europe and East Asia. China has been the biggest culprit of this practice over the past 20 years. However, both President Trump and Biden have pushed industrial policy back to the top of policymaker’s agenda in the US. Manufacturing construction spending in the US has risen exponentially in the last two years due to the inflation reduction act and chips act. Government bills that actively promoted onshoring to the disadvantage of non-US companies. Europe had its own chips act and China continues to subsidies its high-tech industries. We are moving into a world where governments see trade morphing from a win-win to a zero-sum game. This comes with more planning uncertainty for companies. And tariffs will just add to the headwinds.
Week ahead
US inflation amid global rate cuts
Last meetings of the year. It’s a big week for inflation across the world as central banks continue to tread carefully with interest rates cuts due to emerging risk factors that could keep price pressures elevated. This mantra could apply to decision making in 2025. For now, the December meetings in the Eurozone, Canada, and Switzerland will likely not take Trump into consideration, leading to three rate cuts next week. US equity markets and the dollar have enjoyed strong inflows this year and seem tactically stretched, suggesting volatility surrounding important risk events.
US inflation to remain elevated. Fed speakers have looked through the recent string of better-than-expected macro data and continue to see a rate cut in December as the base case. The question now will be if the upcoming inflation print changes policy makers minds. Core inflation is expected to come in hot once again, rising by 0.3% on the month in November and matching the October rise. Headline inflation could be lifted from 2.6% to 2.7% year-over-year.
Three rate cuts. The Bank of Canada, European Central Bank, and Swiss National Bank are all expected to cut interest rates by 25 basis points. Canadian policy makers will downgrade the size of the policy easing from 50 to 25 basis points due to favorable base effects on the inflation front. The ECB will continue to place heavy emphasis on the weak economic growth prospects and could set the tone for more aggressive easing going into 2025. Rising implied one-week FX volatility highlights the fact that this will be a risk event to watch, especially as new forecasts are being released as well. The same goes for Swiss policy makers, which are still torn between a 25 or 50 basis point cut. We favor a smaller cut as the Swiss franc continues to keep import inflation at bay.
FX Views
The parity puzzle
USD Waning momentum. The consensus view is that the US dollar strength holds into 2025. However, in the very short term, bullish USD momentum has waned. The US dollar is currently on track for a second consecutive negative week after the Greenback appreciated eight weeks in a row. Options traders are also paring their bullish outlook of the dollar as the euro rebounded and expectations of a rate hike in Japan boosted the yen. A slide to parity for EUR/USD remains possible in 2025 but requires more positive US data and a hawkish shift in Fed expectations. Instead, the US dollar danced to the tune of dovish Fed speech this week, which sent US yields to their lowest in over a month.
EUR Stabilizing, but lacking tailwinds. The euro remains the worst performing of the G10 pack since the US election, down over 5% over the last month. However, the common currency seems to have found a floor, since investors likely front-loaded the risks in France this week. Thus, EUR/USD actually climbed to around $1.0580 following the no-confidence vote. Markets have done a good job discounting the political uncertainty in Europe and the diverging policy paths between the ECB and Fed in anticipation of higher tariffs. The macro picture seems balanced and will put politics into the spotlight. A fall to parity is therefore dependent on 1) more unexpected political turmoil in Germany and France, 2) lackluster stimulus from China throughout 2025 and 3) Trump pushing through with severe tariff hikes. On the other side, clear positive impetus is missing, and political uncertainty and the threat of blanket tariffs on the EU will remain a headwind for some time. Indeed, rising hedging costs are the latest sign that markets are entering a period of heightened volatility. The price for protection against swings in the common currency one week ahead of an ECB’s decision is at the highest since March 2023.
GBP At mercy of US rates. GBP/USD is currently trading at a discount to the UK-US 2-year yield spread but has recently recouped some of its circa 5% decline against the dollar in Q4. As we highlighted recently, a convincing reclaim of $1.27, could see the pair retest the 200-day moving average at $1.2820 soon. A weekly close above this level will call the multi-month downtrend into question A key headwind on the horizon for the pound is a dovish repricing of BoE expectations alongside the ongoing geopolitical and trade risks that are haunting the wider FX space. For now, though, with just a 10% probability priced in of a BoE cut this month and three priced in overall by end of 2025, sterling downside remains capped by relatively higher rates. With this in mind, FX options traders see just a 23% probability of GBP/USD trading between $1.20-$1.25 by the end of Q1 2025, whilst pricing a 39% probability of it trading between $1.25 and $1.30. Meanwhile, due to favourable rate differentials and relative UK politically stability, GBP/EUR is edging closer to €1.21 – a level it’s only been above for 1% of the time since the Brexit vote of 2016.
CHF Decisive start to Dec. Up against almost 90% of its global peers this week, the Swiss franc has benefited from safe haven demand whilst shrugging off the slight downside miss in domestic inflation. Inflation remains comfortably within the Swiss National Bank’s 0-2% target range bolstering expectations for a fourth consecutive rate cut on December 12. Markets are pricing about a 50% chance of a move bigger than 25 basis points, so a jumbo cut would weigh on the franc, but a standard cut could lift it. Given net short positioning of speculators in the franc versus the dollar remain stretched well beyond their 10-year average, we see scope for USD/CHF to drop beyond the 0.88 support handle and towards its 100-day moving average nearer 0.87 if Swiss bulls assemble. Against the euro, stable politics and haven virtues may continue to give the Swiss the edge. Still, with EUR/CHF currently less than 1% away from fresh 9-year lows, intervention risk by the SNB could limit CHF gains. Indeed, last month, SNB FX reserves rose to the highest since June 2023.
CNY Resilience amid moderation. China’s economic landscape reveals a nuanced services sector performance, with the Caixin/S&P Global services PMI at 51.5, indicating continued but moderating expansion. The reading reflects ongoing business activity growth for the 23rd consecutive month, albeit with decelerating overseas demand. Business confidence has reached its highest point since April, suggesting underlying economic resilience. From a technical perspective, USD/CNH demonstrates an interesting pattern, having completed a bullish head and shoulders formation with immediate resistance at 7.3077 and a potential target of 7.3682. Market participants will focus on upcoming CPI, PPI, and trade balance data.
JPY Balancing act at the crossroads. Japan’s monetary policy narrative is experiencing subtle yet significant shifts, with Bank of Japan board members signaling a more balanced approach to potential rate adjustments. The November economic indicators show promising signs of recovery, with the composite PMI entering expansion territory at 50.1, services PMI at 50.5, and an improving employment index at 52.8. These data points suggest a gradual normalization of economic conditions. Chart shows bearish Yen bets have faltered, which puts less pressure on the Yen. Technically, USDJPY is exhibiting a potential head and shoulders top formation, with the Cloud resistance acting as a critical technical barrier. The decreased upward momentum indicates a possible correction, with critical support levels around 146.50-147.00 demanding close attention from market participants. Upcoming key releases including GDP, current account, and industrial production will provide further insights.
CAD BoC in focus next week. The Canadian dollar remains on the softer side but has recovered tentatively from recent 4-year lows versus its US counterpart. US president-elect Donald Trump’s tariff threats last week rocked the Loonie, but a weaker USD this week has dragged USD/CAD back towards the important 1.40 handle. The currency pair remains in a long-term uptrend, but a fresh leg higher likely depends on whether Trump’s tariff threats come to fruition. In the meantime, policy divergence remains another headwind for the CAD. Next week, the Bank of Canada will cut interest rates, but the size of the cut is uncertain. Money markets are currently pricing in 40 basis points of easing, so a standard 25 basis point cut could help further support the Loonie in the short term. In anticipation of the meeting, 1-week implied volatility for USD/CAD is at its highest in over a year (barring the US election), but is still below its 10-year average.
AUD Monetary winds of change. The Australian dollar faces a pivotal moment as the RBA considers a subtle policy shift following weak Q3 GDP performance. Expectations point to a mildly dovish recalibration in the December meeting, with potential modifications to communication suggesting reduced rate hike probabilities. The central bank is undergoing a structural transformation, transitioning to three distinct boards by April 2025. Technically, AUDUSD shows consolidation patterns with support around 0.6399-0.6492 and resistance near 0.6650-0.6700, reflecting a cautious market sentiment awaiting clearer monetary policy signals. Key economic indicators this week include NAB business confidence, RBA rate decision, employment change, and unemployment rate.
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.
