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.
