Sterling rises towards highest in over 2-1/2 years versus euro

British Pound

Reuters: Sterling rose against the euro towards its highest level in over 2-1/2 years as investors expect the European Central Bank to cut rates and provide some dovish guidance on Thursday, with the Bank of England seen keeping its current policy next week. BoE Governor Andrew Bailey was quoted as saying Britain's central bank has incorporated four rate cuts in 2025 into its most recent economic forecasts. Meanwhile, markets expect the ECB to cut by 25 bps on Thursday and to deliver more than 100 bps of cuts by July 2025.

Analysts expect U.S. tariffs to hurt the euro area's economy and the single currency. However, the impact on the United Kingdom is unclear, as BoE policymaker Megan Greene argued. The budget of British Prime Minister Keir Starmer is also in the spotlight. A BoE survey showed last week more than half of British employers plan to raise their prices and cut jobs in response to the new government's first budget, under which social security contributions will be increased.

Starmer said he had kept up his ambition for Britain to become the fastest-growing economy in the Group of Seven. Sterling rose 0.15% versus the euro to 82.62 pence per euro. It hit 82.58 on Nov. 11, its highest level since mid-April 2022. "This raises the question as to whether sterling can achieve pre-Brexit referendum levels versus the euro in the foreseeable future," said Jane Foley, senior forex strategist at Rabobank, after recalling that before the Brexit referendum in June 2016, the trading range for EUR/GBP was mainly below 0.80.

"We anticipate that the euro will be under pressure next year, which is likely to allow EUR/GBP to remain on its slow downside trajectory. This suggests that pre-Brexit levels may creep into the sights." Political uncertainty in France and Germany, in addition to a dovish ECB monetary easing path, could weaken the single currency in 2025. Sterling was down 0.05% versus the dollar at $1.2741. The greenback steadied before Wednesday's inflation data, with analysts still assessing whether President-elect Donald Trump's policies will lead the Federal Reserve to tilt to a more hawkish direction after an expected rate cut of 25 bps in the next policy meeting.

US Dollar

Reuters: The dollar traded close to a two-week high versus the yen on Wednesday ahead of a highly anticipated reading of U.S. inflation that could provide clues on the pace of Federal Reserve interest rate cuts. The Australian dollar sagged near a four-month low after a dovish tilt to the central bank's policy outlook a day earlier. That also weighed on New Zealand's kiwi, which languished near a one-year trough. Investors will also watch headlines from China's closed-door Central Economic Work Conference, which runs this week.

The antipodean currencies got a boost at the start of the week after Beijing pledged more fiscal and monetary support for the economy next year, although that was overshadowed by Tuesday's Reserve Bank of Australia dovish statement. RBA Deputy Governor Andrew Hauser is due to speak later on Wednesday. The dollar eased 0.12% to 151.80 yen as of 0045 GMT, but remained close to the overnight peak of 152.18 yen, its strongest level since Nov. 27. The dollar index, which measures the currency against the yen and five other major peers, was steady at 106.36, after rising to a one-week high of 106.63 in the previous session.

Traders currently assign 85% odds to a quarter-point rate cut by the Fed on Dec. 18. Economists expect both headline and core consumer prices to have risen 0.3% in November, from previous increases of 0.2% and 0.3%, respectively. "Should this scenario materialize, there could be concerns that the Federal Reserve may not be able to cut rates as quickly as hoped, potentially benefiting the U.S. dollar," said James Kniveton, senior corporate FX dealer at Convera. In the case of Australia, "while the market anticipates early cuts, the RBA has not confirmed this plan, and there is a precedent for the market getting ahead of the RBA, only to later adjust its expectations," Kniveton said.

Traders have ramped up bets for a quarter-point reduction in February to 62%, from closer to 50% a day earlier. The Aussie was little changed at $0.6380 after dipping to $0.63655 a day earlier for the first time since Aug. 5. The kiwi was steady at $0.57985 after sliding to $0.5792 on Tuesday, a level not seen since November of last year. The European Central Bank policy decision on Thursday is the main one investors are focusing for the remainder of this week, with markets certain of at least a quarter-point reduction.

The euro was steady at $1.052975. Sterling was little changed at $1.2777. The Swiss franc held firm at 0.8830 per dollar, with markets assigning 61% odds to a half-point rate cut on Thursday from the Swiss National Bank. The Bank of Canada is seen as likely to cut by a half point later on Wednesday, which is helping to pin the loonie near a 4-1/2-year trough to the greenback. One U.S. dollar last bought C$1.4173.

South African Rand

Reuters: South Africa's rand weakened against a stronger dollar on Tuesday as investors shifted their focus towards monthly U.S. and local inflation figures. At 1517 GMT, the rand traded at 17.85 against the U.S. dollar, about 0.4% weaker than Monday's close. The greenback was last trading up about 0.39% against a basket of currencies as markets awaited further clues on the Federal Reserve's interest rate trajectory ahead of U.S. consumer price data due on Wednesday. Meanwhile, South Africa-focused investors will look to the statistics agency at 0800 GMT on Wednesday for the release of November inflation figures.

Economists polled by Reuters predict annual inflation of 3.1% last month. The rand was little affected by positive local economic data releases on Tuesday, with South Africa's manufacturing output rising 0.8% year-on-year in October and mining output increasing 1.4% YoY in the same month. South African business confidence also saw its biggest YoY improvement in almost two years in November, boosted by higher tourist numbers, precious metal prices and new vehicle sales, data showed. On the stock market, the Top-40 index closed about 0.4% lower. South Africa's benchmark 2030 government bond was weaker, with the yield up 7 basis points at 8.97%.

Global Markets

Reuters: Asian stock markets and the dollar took a breather on Wednesday ahead of an anticipated rate cut in Canada and a U.S. inflation reading expected to leave the Fed on course to cut rates again. Investors were a touch cautious because, with an 85% chance of a U.S. rate cut next week priced in and with Wall Street indexes around record highs, there is room for disappointment. The S&P 500 had dipped 0.3% overnight though it was just 65 points, or a little short of 1% shy of its all-time high.

U.S. futures were 0.1% higher in the Asia morning. MSCI's broadest index of Asia-Pacific shares outside Japan was flat and Japan's Nikkei fell 0.4%. U.S. Steel shares had dropped nearly 10% overnight on a Bloomberg News report suggesting Nippon Steel's $15 billion takeover bid would be blocked. Hong Kong and China shares were steady, having handed back gains as traders dialled down excitement about a readout that showed the Politburo had shifted its monetary policy stance and sought to boost consumption.

The median forecast of economists polled by Reuters is for headline and core U.S. consumer prices increasing 0.3% month on month, for November. No forecasts were above 0.3%, which analysts say leaves markets vulnerable to a surprise. "The 0.4% case is a barnburner," said trader and president at analytics firm Spectra Markets, Brent Donnelly. "The trade is to buy USD and sell stocks on 0.4% and do nothing otherwise." The dollar is likely to rise if markets pare back the speed and depth of expected U.S. rate cuts.

Analysts at the Commonwealth Bank of Australia think the dollar index will probably drift lower towards 105.1 if inflation meets expectations, but could shoot up towards 108.1 if core inflation comes in at 0.4% or higher. The index was last at 106.36. U.S. yields had ticked marginally higher and benchmark 10-year yields were steady in Asia at 4.2302%. The Canadian dollar touched a 4-1/2 year low on Tuesday and, at C$1.4168 per dollar, was close by on Wednesday as traders saw an 89% chance of a super-sized 50 basis point rate cut later on Wednesday.

Canada has already reduced rates by 125 basis points this cycle but news last week that Canada's jobless rate spiked to an eight-year high of 6.8% in November has driven bets on an extra 50 bps of cuts, which would bring the overnight rate to 3.25%. Broader foreign exchange markets were steady, with the euro at $1.0533 and the yen at 151.70 per dollar. Markets have fully priced a European Central Bank rate cut for Thursday and a 61% chance of a 50 bp cut from the Swiss National Bank, which would help cool a rally in the franc.

On Tuesday, Australia's central bank left rates on hold, as expected, but dropped a veiled reference to the possibility of a future rate hike and sent the Aussie dollar down sharply. The Aussie was nursing a 1% drop from the previous session at $0.6381 on Wednesday, while the kiwi had also suffered a kicking and bought $0.5798. China's resumption of gold buying for reserves seems to have helped spot prices break a recent range and gold was above its 200-day moving average at $2,700 an ounce on Wednesday.

In other commodity markets, a brief fillip from China's policy shift seemed to have passed and oil prices were broadly steady with Brent crude futures at $72.48 a barrel. Arabica coffee prices hit a record just above $3.48 a pound on Tuesday as dealers worry a drought is going to cut output for top producer Brazil.

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