Written by Convera’s Market Insights team
Politics will continue to matter
Boris Kovacevic – Global Macro Strategist
The US election is finally over, and investors welcomed the decisive win of former president Donald Trump over vice-president Kamala Harris. Not only is the worst-case scenario of a drawn-out contested election now averted, but Trump’s also pro-growth agenda is already acting as a tailwind for stock markets and the US dollar. The S&P 500 had its best election day on record, the strongest week of the year, and pushed to its 50th record highs of 2024. Prospects of deregulation led the small-cap equity benchmark Russel 2000 to its best week since 2020.
The expected expansion of the government’s budget deficit and likely introduction of tariffs on the other side are fuelling inflationary trades. Protecting against a surge in inflation is becoming more expensive again and government bond yields have risen across the curve. The Federal Reserve is still expected to ease policy one last time in December, bringing the total rate cuts of the year to 100 basis points. However, markets have recently pared back expectations of further easing for 2025 with the fed funds rate expected to bottom at around 4%. Macro, monetary policy, and sentiment have therefore all worked in the dollars favour with the currency appreciating for a sixth consecutive week. The DXY is back above a 3.5% year-to date gain as the focus now shifts back to economic data to drive currency markets.
The next volatility catalyst will be the US inflation print due on Wednesday. Core inflation is expected to have stagnated at 3.3% for a second month in a row in October, after bottoming at 3.2% in July. The Fed will pay attention to this first sign of a potential turnaround of the otherwise positive disinflation trend of the past 12 months or so. On the political front, focus will remain on Donald Trump shaping up his upcoming administration via new appointees and policy previews. The president-elect has already asked arch protectionist Robert Lighthizer to be the Trade Representative, highlighting the resolve to go through with tariff increases. This has boosted the Greenback and shows the sensitivity of markets to political headlines. Monetary policy wise, a plethora of Fed officials are scheduled to speak this week, including Jerome Powell.
Trade, domestic policy weighing on euro
Boris Kovacevic – Global Macro Strategist
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. Planning uncertainty will continue to dampen business investment and expansion plans. According to the DIHK, more than half of German companies classify domestic economic policy as a counterproductive for their own development. In a world of rising geopolitical tension and trade fragmentation, the ruling coalition has not set up Europe’s largest economy for success. This has led French President Emmanuel Macron to urge his fellow leaders to rise to a decisive moment to promote the continent at the fifth meeting of the European Policy Community in Budapest.
This is just another headwind for the common currency already struggling with a dovish ECB pivot and the prospects of US tariffs under Donald Trump. The news of Robert Lighthizer becoming the US Trade Representative speaks to the new administrations resolve to impose striker import restrictions on goods coming from the rest of world, including the European Union. At the same time, the trade spat surrounding electric vehicles with China is going on as well. EUR/USD is fighting to stay above the $1.07 level but the pressure of below target inflation and subdued growth prospects are weighing on the currency. Markets seemingly see the ECB as the most dovish central bank going into 2025. This will limit the upsides on the currency pair for now.
UK jobs report in focus
George Vessey – Lead FX Strategist
The British pound continues to grapple with the $1.29 handle versus the US dollar, not too far from where it was ahead of the US election. It’s been one of the more resilient G10 currencies in the wake of Donald Trump’s election victory so far. One reason can be put down to the hawkish Bank of England (BoE) interest rate cut last Thursday, which saw the central bank raise growth and inflation projections. Thus, the BoE is still seen as the least dovish of the G3 central banks over the next 1-2 years, providing the pound a positive yield appeal.
Nevertheless, despite GBP/USD staging a recovery rebound towards $1.30 late last week, after finding support at its 200-day and 200-week moving averages nearer $1.28, the pair suffered its sixth weekly decline in a row. The rising threat of universal tariffs is a headwind for the UK currency, but seemingly not as much as it is for the euro. Therefore, we think there is a rising possibility of the correlation between GBP/USD and EUR/USD breaking down further. Since the start of 2023, GBP/USD has risen 8% against the dollar, whereas EUR/USD has only risen a mere 1%. As such, GBP/EUR remains buoyant too and looks set to test fresh 2-year highs. This is aided by the shift in real-yield differentials in the pound’s favour and the ongoing political and economic instability weighing on the euro.
A big week featuring wage and GDP data is coming up for the UK. Growth likely slowed from 0.5% to 0.2%, reflecting one off effects such as a big surge in government spending last quarter. The job report on Tuesday should show a steady decline in regular pay growth from 4.9% to 4.7%. Wage growth is moving in the right direction for the BoE, but only slowly.
GBP/EUR near 2-year high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 11-15
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.
