Important calendar events
The dollar remained steady on Thursday, and the index hovered close to 106.1. US treasury yields remained unchanged, with the US 10-year bond yielding 4.26%. Thursday was a bank holiday in the US in observance of Thanksgiving Day. Treasury yields remain the same on bank holidays and the dollar usually trades with low volatility.
Forex markets were quiet on Thursday, with most currency pairs exhibiting thin trading volumes on Thanksgiving Thursday, as US markets were closed. This Friday is Black Friday for the US, and thin liquidity is also expected on Friday.
The US Federal Reserve cut interest rates by 25 basis points in November to a target range of 4.50% to 4.75%. The Fed had already launched its easing cycle in September, with an aggressive 50-bp rate cut, signaling the end of its restrictive monetary policy. Fed Chair Jerome Powell has stated that the progress of disinflation is steady, and the labor market is strong, permitting a shift towards a more neutral monetary policy.
The minutes of the Fed’s November meeting were released on Tuesday and were indicative of the divergence in FOMC members’ opinions. According to the minutes, policymakers expressed different opinions on the Fed’s rate outlook during the latest meeting. Some officials were in favor of pausing rate cuts and maintaining interest rates at restrictive levels if inflation remained high. Other policymakers argued in favor of further rate cuts to boost the US economy and labor market.
Persistent price pressures may prevent the Federal Reserve from pivoting to a less restrictive monetary policy. US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2.0% target. Headline inflation rose to 2.6% year-on-year in October from 2.4% in September.
Core PCE Price Index data released on Wednesday confirmed that price pressures in the US remain high. Core PCE Price Index is the Federal Reserve’s preferred inflation gauge and influences the central bank’s policy outlook. US Core PCE inflation rose by 0.3% in October up from 0.2% in September. Annual Core PCE Price Index rose to 2.8% in October from 2.6% in September, indicating that disinflation in the US is stalling. Core PCE Price Index data released on Wednesday are likely to deter the Fed from cutting interest rates in December. Wednesday’s inflation data, however, were within market expectations and their effect had already been priced in. Market odds of a December rate cut rose to approximately 70% this week putting pressure on the dollar.
Preliminary GDP data for the third quarter of the year released on Wednesday were in line with previous estimates. The US economy expanded by only 2.8% in the third quarter of 2024, after rising by 3.0% in the second quarter of the year and by 1.4% in the first quarter of the year, while markets were anticipating 3.0% growth in the third quarter of 2024. The US economy is suffering from prolonged tightening, raising recession concerns.
US Unemployment Claims released on Wednesday dropped slightly to 213K for the week ending November 22 from 215K the week before. Durable Goods Orders rose by 0.2% in October, falling short of expectations of 0.4% growth but exceeding September’s reading of 0.7% contraction.
CB Consumer Confidence, which is a leading indicator of economic activity and health, rose in November according to data released on Tuesday. The CB index rose to 111.7 in November from 109.6 in October, which was in line with expectations. On the other hand, the sales of new homes in the US dropped to 610K in October from 738K in September, indicating declining economic growth.
President-elect Donald Trump communicated more tariff measures on his social media on Tuesday, causing increased volatility in Forex markets. Trump stated that his administration would impose an additional 25% tariff on imports from Canada and Mexico, with an additional 10% to the 60% already announced during his election campaign on Chinese goods.
News that President-elect Donald Trump has nominated hedge fund manager Scott Bessent for US Treasury Secretary put pressure on the dollar on Monday. Bessent is known for his cautious stance, and he is considered a safe choice to take over from Janet Yellen as the next US Treasury Secretary. Bessent’s appointment is considered by markets as likely to promote economic growth, which is lowering the demand for safe-haven assets and putting pressure on the dollar.
EUR/USD traded sideways on Thursday, oscillating around the 1.055 level with low volatility. If the EUR/USD pair declines, it may find support at 1.033, while resistance may be encountered near 1.061.
Political instability in France put pressure on the Euro this week. France’s government is struggling to pass its budget. France’s Prime Minister, Michel Barnier, has warned that if the French parliament does not support the budget bill, the French government could fall.
The ECB lowered its benchmark interest rate by 25 basis points in October, bringing its main refinancing rate to 3.40%. The ECB started its easing cycle in June, lowering interest rates by 25bps for the third time this year in October.
ECB President Christine Lagarde has not committed to future rate cuts. A 25-basis point rate cut in December, however, is already priced in, with some analysts predicting an even sharper 50-bp rate cut in December.
ECB rate cut expectations dropped on Wednesday after ECB member Isabel Schnabel delivered a hawkish speech on Wednesday. Schnabel stated that she was against pivoting to a more accommodating monetary policy and advised caution in cutting interest rates further. At the same time, Fed rate cut expectations in December went up on Wednesday, boosting the Euro concerning the dollar.
The Euro is so far holding its ground against the dollar this week as markets showed relief that the EU has so far been exempt from Donald Trump’s proposed import tariffs to the US. During his presidential campaign, Trump had threatened that the EU would pay a big price for not buying enough exports from America. After the announcement of Trump’s proposed tariffs on Tuesday, German economy minister Robert Habeck said the EU must enter negotiations with the US to avert a potential trade war.
On the data front, inflation data for Germany on Thursday showed that disinflation is progressing in the Euro Area’s leading economy. Preliminary CPI data showed that monthly inflation contracted by 0.2% in November, which was in line with expectations. In addition, headline inflation in Germany rose by 2.2% year-on-year against expectations of 2.3% growth.
Flash GDP data showed that the Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
Inflationary pressures in the Eurozone are not cooling as fast as expected. Eurozone inflation rose to 2.0% year-on-year in October from 1.7% in September, against expectations of 1.9%. Core CPI, which excludes food and energy, also came in higher than anticipated, remaining steady at 2.7% in October, against expectations of a 2.6% print.
Flash CPI data for the EU are due on Friday and are expected to show an uptick in inflation in November. Headline inflation is expected to rise to 2.3% year-on-year in November and Core CPI is expected to rise to 2.8% annually. After German CPI came in lower than expected on Thursday, however, EU inflation may also surprise on the downside on Friday, which can raise ECB rate cut expectations in December.
GBP/USD edged higher on Thursday, rising from 1.266 to 1.269 on Thursday. If the GBP/USD rate goes up, it may encounter resistance at 1.271, while support may be found near 1.250.
At the latest BOE policy meeting, MPC members voted with a strong majority of 8-1 to cut rates to 4.75%. Bank of England Governor Andrew Bailey stated that the central bank intends to adopt a gradual approach to cutting interest rates. This would give policymakers time to assess the impact of the Government’s new budget on inflation.
BOE Governor Andrew Bailey testified on inflation and the economic outlook before the Parliament's Treasury Committee last week. Bailey stressed that Services inflation is still above a level that's compatible with on-target inflation and that a gradual approach to policy normalization is required. Bailey’s remarks were perceived by markets as hawkish and BOE rate cut expectations in December dropped.
On a similar note, BOE’s Clare Lombardelli stated on Monday that satisfactory progress on disinflation has been made and that she supports a gradual removal of monetary policy restrictions. Lombardelli reiterated on Wednesday that the BOE should be cautious in moving ahead with rate cuts. Lombardelli also warned that Trump's proposed tariffs would pose a risk to economic growth in the UK.
In addition, British inflation data came in hotter than anticipated last week, squashing rate cut expectations in December. UK CPI data showed an uptick in British inflation in October, which may prevent the BOE from cutting interest rates further. Headline inflation in the UK rose to 2.3% year-on-year in October from 1.7% in September, surpassing expectations of 2.2%. Core annual inflation, which excludes food and energy, climbed to 3.2% in October from 3.2% in September against 3.1% anticipated.
GDP data showed that the British economy contracted by 0.1% % in September, falling short of expectations of 0.2% expansion. In addition, Preliminary GDP data for the third quarter of the year showed that the British economy expanded by just 0.1% against expectations of 0.2% expansion. In addition, GDP data for the second quarter of 2024 were revised downward to reflect 0.5% growth against initial estimates of 0.6%.
This week there are no major fundamentals coming up for the UK. The Sterling is likely to be influenced by MPC members’ speeches and especially by BOE Governor Andrew Bailey’s press conference about the Financial Stability Report on Friday.
The Yen’s rally was halted on Thursday and USD/JPY rose above the 151.0 level. If the USD/JPY pair declines, it may find support at 150.0. If the pair climbs, it may find resistance at 155.9.
CPI Inflation data for Japan came in hotter-than-expected last week, raising the odds of a BOJ rate hike in December, and providing support for the Yen. Headline inflation in Japan rose by 2.3% year-on-year in October against expectations of a 2.2% print.
Inflation data for Japan released on Tuesday, however, were overall mixed. Services Producer Price Index data released on Tuesday for Japan exceeded expectations. SPPI is a leading indicator of consumer inflation since producers’ prices are passed down to consumers. SPPI rose to 2.9% annually in October against expectations of 2.5% growth. In addition, September’s print was revised upward to 2.8% from initial estimates of 2.6%.
BOJ Core CPI data, however, which were also released on Tuesday, showed a drop in Japan’s inflation. BOJ Core CPI dropped to 1.5% year-on-year in October from 1.7% in September against expectations of 1.8%. Tuesday’s inflation data did not provide conclusive evidence of rising inflationary pressures in Japan and the BOJ may hold off on raising interest rates until the next year.
The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its latest policy meeting. The BOJ had pivoted to a more hawkish policy at its meeting in July, raising interest rates by 15 basis points, the BOJ’s largest rate hike since 2007. The BOJ had already hiked interest rates once more in March, ending its negative interest rate policy.
BOJ Governor Kazuo Ueda’s forward guidance was hawkish. Ueda hinted at another rate hike in the following months, if economic and inflationary conditions are met. Ueda emphasized, however, that the BOJ’s policy will be data-driven and stated that the central bank will scrutinize data before each policy meeting.
The USD/JPY rate is trading precariously close to the key 155.0 level, raising intervention concerns. The BOJ will likely pivot to a more restrictive monetary policy by the end of the year or at the beginning of 2025, which will provide some much-needed support for the Yen. At the same time, the US is easing interest rates, moving towards a less restrictive monetary policy, which is slowing down the USD/JPY’s ascent.
Japan’s economy expanded by 0.2% in the third quarter of the year, down from 0.7% in the second quarter. The Japanese economy has started to expand, after shrinking by 0.5% in the first quarter of the year.
Important economic data are due on Friday for Japan and are likely to cause increased volatility in USD/JPY. Tokyo Core CPI data on Friday are expected to show an uptick in Japan’s inflation in November. If market estimates come true, the odds of a BOJ rate hike in December will rise again, boosting the Yen.
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Written by:
Myrsini Giannouli
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