Muted Activity Amid Conflicting Signals
Sterling advances amid favourable market dynamics
The Pound rose against the Euro and Dollar ahead of the weekend, with GBP/EUR testing €1.2030 and GBP/USD climbing to $1.2743 amid a broader USD pullback. Sterling benefits from a low-volatility environment favouring ‘carry currencies’ like the Pound, supported by the Bank of England’s cautious rate-cutting approach.
“Sterling is a carry currency,” says James Nelligan of JP Morgan, adding that its yield advantage is key. The BoE is expected to hold rates steady in December, unlike the ECB and Fed, which are likely to cut, further enhancing Sterling’s appeal.
The Dollar’s correction from overbought November levels is also aiding the Pound. “The USD rally has paused, with the broad USD on track for its first weekly decline in two months. We expect this trend to persist through year-end,” says Kristoffer Kjær Lomholt of Danske Bank.
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Stagnant German inflation bolsters rate cut speculation, pressuring the Euro
German inflation (HICP) stagnated at 2.4% year-on-year yesterday, below the expected 2.6%, reinforcing expectations for a 50bp ECB rate cut in December. While only 1bp was added to rate cut pricing (now at 30bp), longer-dated rates rallied after the release. Eurozone inflation data due today could mirror this downside surprise, accompanied by more central bank commentary. ECB’s Francois Villeroy suggested rates no longer need to constrain growth and signalled room for cuts, while Klaas Knot emphasised ignoring supply shocks unless inflation expectations shift, highlighting mixed ECB views reflected in market pricing. Carsten Brzeski, ING’s head of macro, sees the data favoring hawks, making a 25bp December rate cut more likely. Markets, however, are turning dovish, weighing on EUR after its brief bounce on Schnabel’s remarks. EUR/USD fell from just below $1.0600 on Wednesday, with further corrections yesterday. As US markets reopen, the pair is likely to trend toward $1.0500, supported by a 4bp tightening in the EUR:USD rate differential.
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US markets reopen amid subdued activity and global dovish sentiment
The US market reopens today following Thursday’s Thanksgiving holiday, though activity is likely to remain subdued. With no key data releases on the calendar, markets may focus on the dovish sentiment from Europe following Germany’s inflation figures. However, Wednesday’s core PCE data highlights the ongoing divergence between US and European policy. The DXY saw a slight rebound yesterday in thin trading, recovering about a quarter of Wednesday’s losses after hawkish remarks from ECB policymaker Isabel Schnabel. Today, further corrections are expected, with markets likely returning to previous positions as global sentiment leans dovish, while the Fed’s December decision remains uncertain.
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