Important calendar events
The dollar increased on Monday, and the index rose from 106.1 to 106.3. US treasury yields declined, however, putting pressure on the dollar, with the US 10-year bond yield dropping from 4.21% to 4.19%.
President-elect Donald Trump stated on social media over the weekend that BRICS nations would face 100% tariffs if they created a new currency to replace the dollar. BRICS is an intergovernmental organization comprising nine countries – Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates. On Monday, Trump’s threats boosted the dollar against rivaling currencies on rising concerns that the incoming US President will start multiple trade wars.
Last week Trump also announced more tariff measures, 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 extra 10% to the 60% already announced during his election campaign on Chinese goods.
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. Market odds of a December rate cut dropped from 68% to 63% on Monday, boosting the dollar.
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 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 and may deter the Fed from cutting interest rates in December.
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.
Manufacturing PMI data released on Monday for the US were optimistic, boosting the dollar. ISM Manufacturing PMI rose to 48.4 in November from 46.5 in October against market expectations of 47.5. November’s print remained below the threshold of 50.0 which denotes industry expansion, but an improved reading indicates that the US manufacturing sector is contracting at a slower pace.
The most important data coming up this week is the US labor data, starting with JOLTS job openings on Tuesday. ADP Non-Farm Employment Change on Wednesday is expected to show that fewer new jobs opened in November, indicating that the US labor market is weakening. Non-farm payrolls, or NFPS on Friday are this week’s most highly anticipated fundamentals and are likely to cause volatility in the price of the dollar. Friday’s data are expected to show significant improvement in NFPs in November compared to October’s reading. If market estimates come true, the dollar is likely to gain strength.
EUR/USD dropped from 1.056 to 1.046 on Monday as the dollar gained strength. If the EUR/USD pair declines, it may find support at 1.042, while resistance may be encountered near 1.059.
The Euro sank on Monday as a climate of political instability prevailed in France. France’s government is struggling to pass its budget, with Prime Minister, Michel Barnier warning that if the French parliament does not support the budget bill, the French government could fall. Barnier has been negotiating with far-right National Rally leader Marine Le Pen but talks between the two parties during the weekend were fruitless. On Monday, Barnier activated a special legislation that allows him to surpass the French Parliament and have his social security bill adopted. This move backfired against the French Prime Minister, however, as the two main parties of the government’s opposition put forward a no-confidence vote, that can topple the French government this week.
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.
On Monday, ECB member Phillip Lane hinted that the central bank should move forward with additional rate cuts. On a similar note, ECB’s Martins Kazaks stated on Monday that the rate cut must continue.
On the data front, Eurozone inflation remains above the ECB’s 2% target and may prevent the ECB from cutting interest rates in December. Eurozone inflation rose to 2.3% year-on-year in November from 2.0% in October, which was in line with expectations. Core CPI, which excludes food and energy, remained steady at 2.7% in November, against expectations of a 2.8% print.
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.
GBP/USD dipped from 1.273 to 1.264 on Monday as the dollar rallied. If the GBP/USD rate goes up, it may encounter resistance at 1.275, while support may be found near 1.250.
The BOE delivered its biannual Bank Stress Test report on Friday. According to the report, investors are expressing concerns about the sustainability of rising government debt, which may cause volatility in financial markets. The stress tests, however, showed that the British banking system remains robust and could survive a severe global economic downturn.
The BOE also warned that higher trade barriers could inhibit global economic growth, causing volatility in financial markets. Donald Trump’s threats of new tariffs against BRICS countries on Monday put pressure on the Sterling.
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.
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%.
USD/JPY gained strength in early trading on Monday, rising above the key 150.0 level but pared the day’s gains later, dropping back to 149.7. If the USD/JPY pair declines, it may find support at 148.4. If the pair climbs, it may find resistance at 156.7.
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 BOJ will likely pivot to a more restrictive monetary policy by the end of the year, 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.
Ueda stated on Saturday that the next interest rate hikes are nearing, in the sense that economic data are on track. Ueda also stressed that the BOJ will lower monetary easing at the appropriate time to ensure that Japan’s inflation rises to 2%.
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. Tokyo Core CPI data on Friday showed an uptick in Japan’s inflation in November. Tokyo Core CPI came in at 2.3% annually in November, beating expectations of 2.0% and far exceeding October’s print of 1.8%. In addition, Headline inflation in Japan rose by 2.3% year-on-year in October against expectations of a 2.2% print according to CPI data released on Wednesday. BOJ Core CPI data, however, 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%.
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.
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Written by:
Myrsini Giannouli
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