Written by Convera’s Market Insights team
Dollar reverses after services miss
George Vessey – Lead FX Strategist
A mixed US data batch and flurry of Fed speakers yesterday left the US dollar index lacking directional impetus. 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 intraday highs. There aren’t many bearish catalysts hanging over the dollar, but a continuation of softer economic releases, supporting rate cuts, could start weighing heavier.
Looking at the detail of the ISM report, new orders and employment both undershot expectations, but prices paid were unexpectedly resilient. Thus, it appears the services sector is performing the opposite to manufacturing. The US is a services driven economy, so more weight should arguably be put on the more disappointing figures from Wednesday, though the sector is still in expansion territory. Meanwhile, Federal Reserve Bank of St. Louis President Alberto Musalem stated it may be time for policymakers to slow the pace of interest-rate cuts amid higher than desired inflation and declining concerns over the labour market. These more hawk comments likely helped limit dollar losses.
Moreover, the widespread depreciation of the Japanese yen supported the dollar index. This was partly linked to the relief that South Korea’s martial law was lifted, but also because the odds of a rate hike by the Bank of Japan this month fell to 31%, from about 60% at the start of the week. Looking forward, it’s a quieter day on the US data docket, but volatility is likely to stay elevated as we brace for the non-farm payrolls report on Friday.
Let’s talk about parity
Boris Kovacevic – Global Macro Strategist
Equity markets and the euro gained in yesterday’s session despite the collapse of the French government and the ousting of Prime Minister Michel Barnier in a no-confidence vote. Fiscal policy continues to be on top of European policy makers agenda this year and has already led two governments into their downfall (France, Germany). Both countries are now in limbo and unable to enact much needed legislation. However, the euro seems to have been front-loading the French decision and climbed following the no-confidence vote to around $1.0520.
Significant attention has been given to recent forecasts of EUR/USD falling to parity over the next couple of months. While we have warned about increasing risks of such a move materialize since early November, it fails to become our baseline assumption. The recent slide of the common currency has been reasonably well in line with the nominal and real rate differential, economic sentiment, central bank pricing, inflation expectations and relative yield steepness.
This highlights the fact that 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) lacklustre 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 will remain over the euros head for some time, acting as a headwind.
Sterling snaps back
George Vessey – Lead FX Strategist
After a pullback in the pound, driven by Bank of England (BoE) Governor Andrew Bailey’s dovish comments, GBP/USD edges back above $1.27 following disappointing US data bruising the dollar. As we mentioned yesterday, a convincing hold above $1.27 could see a test of the 200-day moving average at $1.2818 soon. December is usually a positive month for the pound, but Q1 next year looks challenging.
Bailey reiterated the BoE would pursue “gradual” reductions — suggesting cuts would occur once a quarter next year. Thus, the 100 basis points Bailey indicates contrasts with around 80 basis points that overnight indexed swaps are pricing in at present. If markets start to take note of the BoE’s more dovish tones, and fully price in four cuts instead of three for 2025, then sterling’s attractive rate differential will weaken. This is a key headwind on the horizon for the pound, alongside the ongoing geopolitical and trade risks that are haunting the wider FX sphere. For now, though, sterling remains supported by relatively higher rates. There’s just a 10% probability priced in of a BoE rare reduction this month.
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 higher 39% probability of it trading between $1.25 and $1.30. However, we do note that the first quarter next year could still be tricky for sterling given GBP/USD usually underperforms in the first few months following a Republican victory in US elections.
Euro above $1.05 again
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: December 2-6
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.
