Written by Convera’s Market Insights team
Equities and oil rebound
George Vessey – Lead FX Strategist
Risk appetite rebounded on Monday after last week’s slide, with the tech-heavy Nasdaq 100 halting its longest rout since January, as Tesla jumped another 8%. The tumult in Treasuries also faded after 10-year yields approached the 4.5% mark. The US dollar index extended its fall from over 1-year highs as expected given it was in overbought territory. Oil prices jumped though, sending small shock waves across FX.
In the very short term, the dollar may come under further selling pressure, absent external shocks that rock risk sentiment. 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. Meanwhile, oil prices staged their biggest daily rise since early October on Monday. Oil rose more than 3% after the US gave Ukraine the green light to use long-range missiles inside of Russia. Moreover, the news of a production halt at Norway’s Johan Sverdrup oilfield, Western Europe’s largest, due to an onshore power outage, raised concerns about tightening supply in the North Sea crude market.
The Canadian dollar thus caught a brief reprieve from steady selling pressure. USD/CAD fell sharply from 54-month highs at $1.41 after six successive daily advances. Today, all eyes will be on headline Canadian inflation figures for October, which are expected to accelerate on an annualized basis, and possibly further support the so-called Loonie.
Trade war growth negative, inflation positive
Boris Kovacevic – Global Macro Strategist
Traders have pared back their bets on policy easing from the European Central Bank (ECB) for next year to start the week off. Options markets are currently pricing in rate cuts worth 135 basis points through the end of 2025, down from 147 last week. Investors could start to reevaluate the potential effect of Donald Trump’s tariff introduction on European goods. While it would clearly increase the probability of another economic downturn on the continent in 2025 and 2026, it would raise prospects of another inflation wave.
The ambiguous relationship between growth, inflation and the trade war could keep the ECB on their toes. A flexible policy approach could be implemented to deal with the unpredictability of the upcoming trade spat. The euro benefited from this repricing and started the week on a stronger footing. It appreciated for a second straight day against the US dollar, a feat the common currency accomplished three weeks ago. German Bundesbank president Joachim Nagel warned that higher inflation induced by trade tensions should be accompanied by higher interest rates.
EUR/USD has been able to distance itself from the $1.05 mark and is approaching the $1.06 level. The short-term options bias continues to favour a bearish view with the 1-month delta risk reversal falling to the lowest level since July.
Higher volatility expected next year
George Vessey – Lead FX Strategist
It was a mixed start to the trading week for the pound, down against pro-cyclical and high beta peers, but up against safe havens. GBP/USD continues to draw support from some follow-through USD profit-taking, with the pair approaching the $1.27 handle. Reduced Fed easing bets and uncertainty surrounding the Bank of England’s (BoE) policy outlook might cap gains though.
BoE Governor Andrew Bailey and several of his policy-setting peers will testify on inflation and the economic outlook before Parliament’s Treasury Committee. This could play a key role in influencing market expectations about interest rate cuts going forward, which, in turn, should provide some meaningful impetus to GBP/USD. Markets are pricing just a 15% probability of a BoE cut next month and just over two cuts are fully priced in by this time next year. Pound options traders are positioning for higher volatility going into next year though in the wake of the US presidential election result and rising risks through the trade and sentiment channels.
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.
Dollar index holds in top 5% of 7-day range
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 18-22
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.
