Sterling picks up versus dollar, flat against euro

British Pound

Reuters: Sterling gained against the dollar on Tuesday after dovish comments from Federal Reserve Governor Christopher Waller and was steady against the euro as political turmoil in France kept investors on edge. The pound was last up 0.16% at $1.2678, recovering some of Monday's 0.7% loss. In the last three months, the pound has fallen 3.33% against the dollar. Waller, a U.S. rate-setter, said on Monday that with inflation still forecast to fall to 2%, he is inclined "at present" to support another interest rate cut later this month.

Markets are now pricing in a 70% likelihood of a 25 basis point rate cut at the Fed's next meeting on Dec. 18, compared to about 50% just over a week ago. In Europe, investors remained cautious after French opposition parties from both the far-right and the left-wing submitted no-confidence motions against Prime Minister Michel Barnier on Monday. Barnier will likely face the vote on Wednesday after fierce opposition from across the political spectrum to his budget, which contains painful tax rises and spending cuts aimed at repairing the country's precarious finances.

The pound traded flat against the euro at 83 pence after gaining 0.12% on Monday. Investors are largely expecting the Fed and the European Central Bank to cut interest rates this month but anticipate that the Bank of England will leave UK rates unchanged on Dec. 19. Fiona Cincotta, senior market analyst at City Index, said the BoE is not showing signs of moving quickly on rate cuts, benefiting the pound, while the ECB might have to cut rates more rapidly. "There's political stability (in the United Kingdom) that is just not present in major economies in the euro zone," Cincotta added.

Earlier on Tuesday, the British Retail Consortium said UK retailers reported lacklustre sales in November, based on industry data. The timing of the Black Friday shopping event this year meant it fell beyond the scope of the November data and will show up instead in the December numbers, which partly accounted for the weakness in consumer spending, according to the BRC.

US Dollar

Reuters: The U.S. dollar recovered from a three-week low versus the yen on Wednesday and held its ground against other major rivals as traders pondered the chances of a Federal Reserve interest-rate cut this month. South Korea's won stabilised following its plunge to a two-year low on Tuesday and then a partial recovery after President Yoon Suk Yeol first unexpectedly declared martial law and then abruptly reversed the decision just hours later following a standoff with parliament.

Dealers said the country's central bank may have supported the won at Wednesday's open by selling dollars. The Chinese yuan languished near its lowest in more than a year in offshore trading, pressured by renewed tariff threats from incoming U.S. President Donald Trump, with traders watching how far Beijing is willing to let its currency slide. Australia's dollar weakened after data showed the economy expanded by less than economists estimated. The euro held its ground above its recent two-year trough, as French lawmakers prepared to vote on no-confidence motions later in the day that are all but certain to topple the government.

The U.S. dollar index, which measures the currency against six top counterparts including the yen and the euro, added 0.07% to 106.39 at 0120 GMT. The dollar added 0.18% to 149.90 yen, continuing its recovery after dipping to 148.65 yen in the previous session for the first time since Oct. 11. The dollar got some support on Tuesday after data showed U.S. job openings increased moderately in October while layoffs declined, even as Federal Reserve officials on the day did not provide definitive guidance on what they intend to do at the conclusion of their next policy meeting in two weeks' time.

Traders are waiting for crucial monthly payrolls data on Friday for more steer on the rates outlook, while a private payrolls report due later on Wednesday will offer something of a preview. Market-implied odds of a quarter-point rate reduction on Dec. 18 last stood at 73%, according to CME's FedWatch Tool. The euro was little changed at $1.0506, where it has been making a home this week as the political crisis in France comes to a head. On Nov. 22, it had tumbled as low as $1.03315.

"We're at the tail end of the crisis," said Marc Chandler, chief market strategist at Bannockburn Forex in New York. "They can't have an election until next July. So what they'll probably do is appoint a prime minister and try again, or let Barnier become the caretaker prime minister and pass some laws to keep the government going until July." Sterling was steady at $1.26645. The won was little changed at 1,413.80 per dollar after beginning Wednesday's trading with a 0.5% jump that reversed almost all of the losses of the previous session, when it plunged as low as 1,443.40 per dollar for the first time since October 2022.

The offshore yuan edged down to 7.2948 per dollar, inching back towards the previous day's low of 7.3145, the weakest since November of last year. The Aussie fell 0.4% to $0.6461. Australia's economy grew at the slowest annual pace since the pandemic in the third quarter. Real gross domestic product rose 0.3% over the three months to September, missing market forecasts of 0.4% growth.

South African Rand

Reuters: The South African rand was steady on Tuesday as investors viewed an unexpected contraction in the economy in the third quarter as a temporary blip. At 1559 GMT, the rand traded at 18.1050 against the dollar, near its previous close of 18.1125. Data from Statistics South Africa showed gross domestic product fell 0.3% in seasonally-adjusted quarter-on-quarter terms while economists polled by Reuters had predicted an expansion of 0.5%. The contraction was due to a drought in the region that caused a big drop in agricultural production, but analysts said they expected a return to modest growth in the coming quarters.

"We still expect the economy to recover in Q4 before strengthening and broadening throughout 2025," said Nedbank analysts in a research note. South Africa has seen increased political stability following the May election, a stronger rand over the period, falling inflation, lower interest rate expectations and an end to rolling power cuts, which has boosted productivity. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed 0.1% higher. South Africa's benchmark 2030 government bond was stronger, with the yield at 8.90%.

Global Markets

Reuters: Asian equities stumbled on Wednesday while currencies were volatile as traders scrambled to contend with the political storm in South Korea, where martial law was imposed and subsequently lifted hours later. South Korea's won strengthened in early trading buoyed by suspected intervention but remained close to the two-year low against the dollar it hit late on Tuesday. The benchmark KOSPI index was down nearly 2%, taking its year-to-date losses to over 7%, making it the worst performing major stock market in Asia this year.

That left the MSCI's broadest index of Asia-Pacific shares outside Japan, which counts Samsung Electronics as one of its top constituents, down 0.32% on Wednesday. South Korean President Yoon Suk Yeol said on Wednesday he would lift a surprise martial law declaration he had imposed just hours before, backing down in a standoff with parliament which roundly rejected his attempt to ban political activity. "Martial law itself has been lifted but this incident creates more uncertainty in the political landscape and the economy," said Min Joo Kang, senior economist at ING.

"We are concerned that these events could impact South Korea's sovereign credit rating, although this is uncertain at this stage. However, this is a scenario that could happen." South Korea's finance ministry said it was prepared to deploy "unlimited" liquidity into financial markets if needed, with the Yonhap news agency saying the financial regulator was ready to deploy 10 trillion won ($7.07 billion) in a stock market stabilisation fund. The finance minister holds a press conference at 0120 GMT.

"A bit of uncertainty here given how the events played that can fuel some rush to safety. But Korean authorities appear to be moving quickly to stabilise markets, and the impact is likely to be short-lived," said Charu Chanana, chief investment strategist at Saxo. Still, the jolt to the market from East Asia stoked further worries of uncertainties around the globe, with investors already reeling from the political turmoil in France that has weighed on the euro, which was down 0.11% at $1.04975.

French bond futures fell 0.13% while European stock futures was 0.14% lower ahead of French lawmakers' vote on Wednesday on no-confidence motions which are all but certain to oust the fragile coalition of Prime Minister Michel Barnier. "If the government collapses, an emergency legislation will likely be adopted to avoid a government shutdown the spread between French and German 10-year government bond yields can further move against the euro," said Carol Kong, currency strategist at Commonwealth Bank of Australia.

On the macro side, investors are hoping for more cues to gauge the policy path the Federal Reserve will likely take next year, with much-anticipated November employment report due on Friday. U.S. job openings increased solidly in October while layoffs dropped by the most in 1-1/2 years, data showed on Tuesday, suggesting the labour market continued to slow in an orderly fashion although another survey showed employers were hesitant to hire more workers. Markets are now ascribing a 72% chance of a 25 basis point cut this month, with 80 bps of cuts expected by the end of next year.

U.S. central bankers said they continue to believe inflation is heading down to their 2% target and signalled support for further rate cuts ahead, but none pushed strongly for or against doing so when they next meet to set rates in two weeks. The spotlight now turns to Fed Chair Jerome Powell on Wednesday who will give what are expected to be his last public remarks before the meeting. The dollar index, which measures the U.S. currency against six rivals, was up 0.12% at 106.45. Gold prices eased 0.17% to $2,639 on a strong dollar.

Oil prices were flat after gaining more than 2% in the previous session as Israel threatened to attack the Lebanese state if its truce with Hezbollah collapses, and as investors positioned for OPEC+ to announce an extension of supply cuts this week.

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