Written by Convera’s Market Insights team
Cautious Fed keeps dollar elevated
George Vessey – Lead FX Strategist
Investors fearing that the rise of inflation would stop the Federal Reserve (Fed) from cutting interest rates in December breathed a sigh of relief following the in-line CPI print last week. However, Fed Chair Jerome Powell’s go-slow message on interest-rate cuts on Friday cooled the risk rally and the Trump trade euphoria that drove US equities to records.
In the FX space, the US 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. Post the US election, markets have moved swiftly to price in the implications of a red sweep scenario. As we reach resistance levels in key crosses such as EUR/USD, the question becomes how much of that outcome has already been priced in; and how much farther price action can extend. The risk of further dollar upside comes from key Trump policy proposals – most notably tariffs – which have arguably not been fully priced in yet.
Although the dollar is currently in overbought territory via the relative strength index, suggesting near-term consolidation beckons, ultimately we envisage sustained dollar resilience with bullish momentum going into 2025. 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.
Nothing to go by at $1.0550
Boris Kovacevic – Global Macro Strategist
The euro stabilized around the mid $1.05 levels in early Monday trading as the week starts off on a quiet note. The agenda in Europa has nothing to offer investors with the only risk event of the week in the form of the purchasing manager indices being released on Friday.
Last week was all about markets continuing to price in the rising probability of the US imposing tariffs on the rest of the world and the US macro data (CPI, PPI, retail sales) outperforming expectations. This has put the euro on its backfoot, falling in six out of the last seven weeks. The $1.12 level seems like a distant memory for euro bulls despite EUR/USD having traded above it as late as the end of September.
On the domestic front, expectations of another 25-basis point rate decrease by the European Central Bank in December and political turmoil in Germany are adding headwinds for the continents assets. Christine Lagarde will be featured twice in speeches throughout the week. But with no data to go by, most of the commentary will likely not be market moving. Expect the euro to be moved by the news flow surrounding the new US administration, tariffs, and Chinese stimulus announcements.
UK data dump looms
George Vessey – Lead FX Strategist
With the Bank of England (BoE) still seen as the least dovish of the G3 central banks, the UK inflation report and retail sales data will be closely scrutinized this week. Gilt yields and potentially the British pound face renewed upside pressure as headline CPI is expected to creep above 2%. That said, gains may be limited against the strong dollar, as evidenced by the decoupling of GBP/USD from UK-US rate differentials of late.
It is becoming clear the last inflation mile for the UK is becoming difficult as services costs remain elevated. With the government pledging expansionary fiscal policy, it seem the BoE might be pushed toward pausing its easing cycle. This could act as a support function for the pound into year-end and 2025. Sterling’s gains are likely to arise more versus the euro though, given UK-German rate differentials linger near multi-year highs. GBP/EUR has slipped back below €1.20 though having clipped a fresh 2-year high last week. Structural improvements for the UK supply side from closer EU-UK ties remain in scope – particularly given likely US policies from the incoming administration – and underpin this long-term trajectory.
The UK is also likely less exposed to direct tariff risks than the Eurozone given its trade deficit in goods with the US. Flash PMIs for November and speeches from BoE policymakers Ramsden and Mann are also on this week’s docket.
Equities, gold and oil lower over the week
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.
