Good morning,
Last Week
The US dollar saw strong gains last week, driven by anticipation of pro-business policies under a potential second Trump presidency and growing market speculation over his Treasury Secretary pick. Geopolitical tensions also surged as President Biden authorised Ukraine to use US-made long-range missiles to strike Russia, a response to escalating attacks on Ukrainian cities and the deployment of North Korean troops to aid Moscow. The conflict has revived fears of nuclear escalation, prompting a rise in safe-haven assets like gold and the dollar. Meanwhile, bitcoin is nearing $100k amid expectations of pro-crypto policies under Trump. Markets remain buoyant for now, but once Trump is inaugurated in January there remains uncertainty on his ability to get some of his key policies through. This could see the rally stall.
Business sentiment in Europe and the UK took a sharp downturn last week, adding momentum to the dollar’s rally. UK business activity hit a 13-month low in November, with the PMI dropping to 49.9 from 51.8. The decline reflects growing dissatisfaction with the Labour government’s Budget, as companies show little confidence in its growth strategy. Across the Channel, France reported its sharpest contraction since January, with its PMI falling to 44.8, driven by weak demand in key industries like automotive and construction. Germany also slipped further into contraction territory, raising pressure on the ECB to cut rates sooner than expected. With both sterling and the euro under heavy selling pressure, JP Morgan now predicts parity between EUR/USD by early next year.
The Japanese yen continued its decline last week, with its value nearing levels that could prompt intervention by Japanese authorities. Despite brief signs of stabilisation, the yen remains under heavy selling pressure as the dollar strengthens across the board. Traders are closely watching for signals from Japan’s central bank, as the yen’s weakness becomes increasingly difficult to ignore. For now, the currency’s bearish outlook persists, driven by robust demand for the dollar and ongoing momentum in the USD/JPY exchange rate. Intervention chatter is growing louder, with markets anticipating a decisive response if the yen’s slide continues unchecked. This week will be crucial in determining whether Japan steps in to support its currency or allows the trend to run its course.
This Week
The US economic calendar is packed this week as markets brace for key data releases ahead of the Thanksgiving break. With inflation and jobs reports in focus, traders are weighing the Federal Reserve’s next move. Fed Chair Jerome Powell has hinted at a pause in rate cuts, but that hinges on the strength of upcoming figures. Wednesday’s PCE inflation report is expected to show core inflation edging up from 2.7% to 2.8%, a potential setback for the Fed’s efforts to ease price pressures. Headline PCE is also projected to rise slightly, from 2.1% to 2.3%. While markets currently price a 25-bps cut in December at around 55%, a hawkish Fed could dash these hopes if the data skews stronger than expected.
All eyes are on the Eurozone this week as investors await Friday’s flash CPI data, a key indicator for the European Central Bank’s next move. While markets are pricing a 25% chance of a 50-bps rate cut in December, ECB policymakers remain cautious. Rising negotiated wages and persistently high services inflation, hovering near 4%, suggest the Bank may opt for a more measured approach. October’s headline CPI rose from 1.7% to 2.0%, and November’s figure is forecast to climb further to 2.4%. If confirmed, this could dampen hopes for a larger cut and lend some support to the euro, which has struggled against the dollar. Before Friday, Germany’s Ifo business survey on Monday will provide an early signal of how political uncertainty is impacting Europe’s largest economy.
Key Events
Tuesday November 26th
15:00 US Consumer Confidence
Wednesday November 27th
00:30 Australian CPI
01:00 New Zealand Cash Rate
02:00 RBNZ Press Conference
13:30 US GDP / Unemployment Claims
15:00 US PCE Price Index
19:00 US FOMC Minutes
Thursday November 28th
All day German Prelim CPI
08:55 RBA Gov Bullock Speaks
Friday November 29th
13:30 Canadian GDP
Have a great week,
The Garton Team.