Market Update: Dollar Weakness and Focus on US Jobs Report

Yesterday’s trading session saw significant broad-based dollar weakness, with the currency losing ground against all G10 peers. Investors are positioning ahead of today’s highly anticipated US non-farm payrolls (NFP) report, widely regarded as the most crucial global macroeconomic release of the month. Market consensus forecasts a 200,000 job gain in November, following a modest increase of only 12,000 jobs in October. Traders are hedging against the possibility of the data missing expectations.

Federal Reserve Chair Jerome Powell’s Wednesday speech had little impact on market expectations for rate policy, with options markets still pricing in a 70% probability of a December rate cut. Meanwhile, equity markets retreated on Thursday, following the S&P 500's 56th record close this year, as weekly jobless claims rose to a one-month high. The labour market remains a key driver of market sentiment, and today’s jobs data will provide investors with a clearer snapshot of employment dynamics.

The US dollar is on track for a second consecutive weekly decline after eight weeks of gains. Similarly, the two-year Treasury yield has fallen from 4.38% to 4.15% over the past two weeks, reflecting shifting sentiment in fixed-income markets.

European Markets Open Lower Amid Political and Economic Concerns

European equity markets are set for a weaker open today, weighed down by ongoing political unrest in France. The euro remains under pressure as traders navigate uncertainties surrounding the European political landscape, diverging monetary policies between the ECB and the Federal Reserve, and the potential impact of higher tariffs, which could exacerbate challenges for the Eurozone economy.

Adding to the gloom, Germany’s industrial production fell by 1% in October, missing expectations of a 1% recovery. This followed a revised 2% decline in September, deepening fears of a winter recession in Europe’s largest economy. Investors are also watching for the third-quarter Eurozone GDP data, though it is not expected to significantly influence markets. Next week, the ECB is anticipated to implement its fourth rate cut of the year. Unlike earlier moves, the size of this cut is uncertain, with discussions hinting at a possible 50 basis point reduction due to a weaker growth outlook despite inflation meeting targets.

In currency markets, the EUR/USD pair is flat for the week, having rebounded from below $1.05 at Interbank (IB), mainly due to broad dollar weakness. However, the euro’s downward trend remains intact beneath the $1.06 IB level, making this week’s close critical. Against the pound, the euro continues to face challenges, with GBP/EUR holding above €1.20 IB for the third consecutive week. Meanwhile, FX options pricing reflects heightened demand for protection against short-term swings in the euro, reaching levels last seen in March 2023.

GBP/USD Near $1.28 at IB: A Turning Point in the Multi-Month Downtrend?

The British pound has gained for three consecutive days against the US dollar, climbing over 2% from its recent low below $1.25 IB. GBP/USD is now trading just 50 pips short of the $1.28 IB level, a key resistance marked by the 200-week moving average at $1.2820 IB. A weekly close above this level could challenge the pair’s multi-month downtrend.

Today’s US payrolls report could serve as a potential catalyst for further gains. Domestically, the UK’s November Decision Maker Panel highlighted rising inflation expectations, increased price-setting plans by firms, and persistently strong wage growth. This marks a shift from the downward trends observed over the past 18 months, suggesting the Bank of England (BoE) may opt for gradual rate cuts due to continued inflationary pressures. These factors have supported the pound, with favourable UK-US rate differentials limiting sterling’s downside since the last election.

However, GBP/USD remains undervalued compared to the UK-US 2-year yield spread, with the pair more influenced by US developments, including the market’s pricing of Federal Reserve policy expectations.

For GBP/USD to solidify a more bullish outlook, stronger UK economic data and weaker US data will likely be needed. While the international backdrop remains fluid, the pair’s trajectory is closely tied to shifting macroeconomic trends on both sides of the Atlantic.

European Markets Show Resilience Amid Political Turmoil

Despite the collapse of the French government and the ousting of Prime Minister Michel Barnier in a no-confidence vote, equity markets and the euro posted gains in yesterday’s session. Fiscal policy remains a central focus for European policymakers this year, having already triggered the downfall of two governments—France and Germany. Both nations are now in a political limbo, unable to implement critical legislation. Interestingly, the euro appeared to have anticipated the French political upheaval, climbing to around $1.0520 following the no-confidence vote.

Meanwhile, significant attention has turned to predictions of the EUR/USD pair dropping to parity in the coming months. Although such risks have been on the radar since early November, this scenario is not yet the baseline forecast. The euro's recent decline aligns with underlying factors such as nominal and real interest rate differentials, economic sentiment, central bank policies, inflation expectations, and relative yield curves.

This underscores that markets have effectively priced in the political uncertainty in Europe and the policy divergence between the European Central Bank (ECB) and the U.S. Federal Reserve, particularly against the backdrop of anticipated higher tariffs. With the macroeconomic landscape relatively balanced, political developments are set to take centre stage.

Mixed US Data and Fed Commentary Keep Dollar in Check

The US dollar index struggled for direction yesterday following a mix of economic data and a series of Federal Reserve comments. ADP employment figures for November came in close to expectations, offering little momentum for the dollar. However, the ISM services index saw a sharp decline, pulling both yields and the dollar off their intraday highs. While bearish pressures on the dollar remain limited, continued softer economic data supporting rate cuts could weigh more heavily going forward.

A closer look at the ISM report revealed weaker-than-expected new orders and employment, while prices paid showed unexpected resilience. This divergence highlights a contrast between the services and manufacturing sectors. As a services-driven economy, the U.S. may see greater significance in the disappointing services data, even though the sector remains in expansion territory.

Federal Reserve Bank of St. Louis President Alberto Musalem added nuance to the outlook, suggesting it might be time to slow the pace of rate cuts, citing persistent inflation and easing concerns about the labour market. These hawkish remarks likely helped mitigate dollar losses despite the weaker data.

GBP/USD Climbs Back Above $1.27 Despite Dovish BoE Outlook

After a pullback driven by Bank of England (BoE) Governor Andrew Bailey’s dovish remarks, GBP/USD rebounded above $1.27, aided by disappointing US economic data that weighed on the dollar. A sustained move above this level could pave the way for a test of the 200-day moving average at $1.2818 in the near term. Historically, December tends to favour the pound, though challenges loom for Q1 next year.

Governor Bailey emphasized the BoE’s intent for “gradual” rate cuts, suggesting reductions of 25 basis points per quarter through 2025, totalling 100 basis points. This contrasts with the 80 basis points currently priced in by overnight indexed swaps. If markets align with the BoE’s outlook and fully price in four cuts rather than three, sterling’s appeal as a higher-yielding currency could diminish. Alongside geopolitical and trade uncertainties, this represents a significant headwind for the pound.

For now, sterling remains buoyed by its relatively high rate differential, with only a 10% probability of a BoE rate cut priced in for this month. However, the broader FX landscape continues to reflect geopolitical and economic risks that could influence future movements.

Market Update: Dovish Fed Tone Tempers Dollar Gains Amid Strong Macro Data

The US dollar softened during yesterday’s session, influenced by dovish commentary from Federal Reserve officials, despite two strong macroeconomic surprises. While the currency remains positive for the week after a strong start on Monday, it gave up some of its earlier gains. Equity markets retreated from record highs as investors shifted focus to government bonds, with the 2-year Treasury yield declining for the sixth time in seven days to 4.15%—its lowest level since early November.

Following dovish remarks from Fed officials Waller and Williams on Monday, Goolsbee and Kugler joined the discussion, signalling potential openness to a rate cut in December. Despite robust economic data, policymakers seem intent on maintaining a policy easing stance. Market expectations for a rate cut in the next meeting held steady at 74%, reflecting a balance between macroeconomic strength and dovish policy outlook.

US job openings surged in October, rising from 7.37 million to 7.74 million—well above consensus and marking the strongest increase in over a year. This renewed focus on the labour market places significant weight on upcoming data releases, including the employment sub-index of the ISM Services report, the ADP private employment report, and the pivotal non-farm payrolls due later this week.

Euro Under Pressure as France's Political Drama Intensifies

European markets remain fixated on France, where the government faces a critical no-confidence vote on Wednesday. President Emmanuel Macron has urged lawmakers to set aside political divisions to maintain the current administration. However, the rising demand for short-term euro downside hedges suggests a lack of confidence in this outcome. Reflecting the heightened uncertainty, EUR/USD option volatility has reached its highest level since March 2023, with macro hedge funds positioning for potential disruptions from global political risks.

With a light economic calendar in Europe this week, political developments and US macroeconomic events have taken centre stage. The euro’s climb above the key $1.05 level yesterday opens the door for a potential rise to $1.0560, particularly if Federal Reserve Chair Jerome Powell aligns with recent dovish rhetoric. However, a breakout beyond $1.06 would likely require either the French government surviving the no-confidence vote or Friday's US jobs report significantly undershooting expectations. Absent these catalysts, the EUR/USD pair is expected to remain within the $1.0460–$1.0560 range.

British Pound Gains Ground Amid Shifting Market Dynamics

The British pound made modest gains against the US dollar yesterday, extending its climb toward $1.27 this morning despite the backdrop of heightened global political risks. Typically vulnerable in such scenarios, the pound’s recent performance highlights its weakened correlation with traditional risk indicators like equities and the VIX index over the past month.

While GBP/USD has yet to decisively breach the $1.27 mark and remains slightly lower month-to-date, it has shown resilience amid recent political uncertainty. A key factor supporting the pound is the Bank of England’s comparatively hawkish stance. With the odds of a rate cut this month at just 10% and only three 25-basis point reductions expected by the end of next year, the BOE appears less dovish than its G3 counterparts. This stance is mirrored by the Federal Reserve but contrasts sharply with the European Central Bank, where greater rate cuts are anticipated. As a result, GBP/EUR has edged closer to €1.21—a level it has surpassed only 1% of the time since the Brexit vote in 2016.

Looking ahead, relative growth and yield advantages, combined with ongoing political instability in Europe, suggest further upside potential for GBP/EUR.

Korean Won Rebounds Amid Political Turmoil, Highlighting Persistent Volatility Risks

The Korean won erased nearly all its politically-driven losses yesterday after the president briefly imposed and swiftly lifted martial law. However, the political landscape remains tense, with the opposition party now calling for the president’s resignation.

These developments reinforce the view that politically-induced currency volatility will persist. Looking ahead to 2025, escalating trade disputes and rising tariffs are expected to sustain strong demand for options hedging as markets brace for further idiosyncratic risks.

British Pound Faces Headwinds Amid Technical Pressure and Economic Uncertainty

The British pound has entered December—historically one of its strongest months—on a weak footing. GBP/USD dropped nearly 1% on Monday, erasing part of last week’s 2% relief rally that briefly brought the pair back toward $1.28. Now trading closer to $1.26, the pair is testing its 100-week moving average for support.

Fresh tariff threats from U.S. President-elect Donald Trump over the weekend have bolstered the dollar, signalling a potentially more volatile foreign exchange environment in the years ahead. However, Trump’s comments could lead to unpredictable short-term price swings, with the longer-term trend possibly smoothing out in unforeseen ways. The only certainty is increased uncertainty.

Compounding the pound's struggles, UK economic data has softened significantly. Citi’s UK Economic Surprise Index has tumbled from +8 in mid-October to -47, reflecting a steady stream of disappointing figures. This has contributed to GBP/USD’s over 5% quarter-to-date decline. Adding to the gloom, British Retail Consortium data released this morning showed a 3.3% year-on-year drop in retail sales for November.

From a technical perspective, the pound remains under pressure as long as GBP/USD stays below its 200-day moving average, currently near $1.28. A sustained weekly close above this level would challenge the prevailing downtrend. However, a return to a more bullish outlook for the pound will likely require stronger UK economic data—a scenario that has yet to materialise.

European Markets Struggle Amid Political Uncertainty and Diverging Economic Prospects

The potential collapse of the French government is driving bond spreads and implied euro volatility to their highest levels this year. Political uncertainty surrounding France’s budget and Germany’s upcoming February election has left Europe’s two largest economies without majority governments capable of advancing key legislation. This paralysis is making the eurozone less flexible and the euro less appealing to foreign investors.

While European equities have benefitted from positive sentiment out of Asia—where investors reacted favourably to less severe U.S. restrictions on Chinese chips and AI components—the euro has borne the brunt of diverging growth trajectories and rising tariff expectations. The EUR/USD opened below the $1.05 mark, reflecting limited appetite to push the currency higher.

Prime Minister Michel Barnier’s contentious negotiations over the social security funding law could lead to the government’s collapse and the appointment of a new cabinet. The premium on French government bonds over German equivalents has reached 85 basis points, the highest since 2012.