USD: Dollar Holds Firm as Fed Division Clouds the Outlook
The dollar has continued to edge higher as uncertainty surrounds the Federal Reserve’s next step. Equities drifted lower for much of the week in search of direction, while the greenback stayed resilient. Markets only found some relief yesterday, when a cluster of headlines led by Nvidia’s strong results helped steady sentiment.
Before that, investors were working with limited official data and relying heavily on alternative indicators. The Fed is adding complexity, with minutes released yesterday showing a sharply divided committee and a sizeable minority favouring unchanged rates through 2025. This stance has pushed expectations for a December cut lower, with the probability of a third easing this year slipping to around 30%. Policymakers continue to highlight stretched valuations and persistent inflation, prompting a shift from an assumed cut to a more cautious wait and see approach.
The Fed will also head into its final meeting of the year without timely labour data. October’s employment report was cancelled due to the shutdown, and November’s will not arrive until after the December meeting. With September’s delayed release landing today, policymakers are navigating without the usual feedback loop. Even so, rapid investment in AI infrastructure remains a structural support for sentiment. Global data centre capex is expected to exceed 1.7 trillion dollars by 2030, reinforcing the view that genuine demand rather than speculation is driving the sector. Nvidia’s latest results further strengthened that argument by providing hard evidence of persistent, broad based AI momentum.
GBP: Labour Softness and Fiscal Concerns Keep Sterling Under Pressure
Recent UK data have softened, complicating the Bank of England’s cautious tone from October. Unemployment has risen to 5 per cent, third quarter growth was just 0.1 per cent, and although headline inflation is easing, pockets of pressure remain. Sterling initially held support near 1.31 before slipping on broader dollar strength.
A reduced likelihood of a September Fed cut, combined with uncertainty from missing US labour data, has kept the dollar supported. Domestically, fiscal concerns are weighing on sentiment ahead of the budget. Thirty year gilt yields climbed towards 5.45 per cent after Reeves reversed course on income tax, adding pressure to the long end of the curve.
The UK data calendar is quiet today, but tomorrow brings PMIs, retail sales and public borrowing. The borrowing figures are likely to draw the most attention. The UK has repeatedly overshot borrowing expectations this year. With growth subdued and inflation still elevated, that pattern is unlikely to change. The Chancellor faces a difficult backdrop with the budget now only days away.
EUR: Higher Volatility Drives EUR/USD Lower
The euro saw its sharpest daily decline of the month against the dollar yesterday as risk aversion and rising rates volatility pushed flows back into USD. The MOVE Index has climbed steadily through November, strengthening the dollar’s defensive appeal.
A notable gap has opened between realised and implied EUR/USD volatility. Realised volatility has eased to around 4.9 per cent, while implied is holding near 6.5 per cent. This signals that markets expect larger swings into year end. Risk reversals still favour euro upside, indicating that investors have not fully abandoned the idea of a late year rebound. Softer US data would be required for that view to gain traction, along with a clearer path to a December Fed cut. With the delayed jobs data clouding the outlook, near term risks lean lower. A move below 1.15 is plausible, with the 200 day moving average near 1.14 offering potential support.
The euro continues to appreciate against the yen, with EUR/JPY reaching new all time highs. With the ECB’s easing cycle essentially complete and a hike not entirely out of the question, the policy backdrop remains supportive.
JPY: Policy Doubts and Geopolitical Tensions Undermine the Yen
The yen remains the weakest currency in the G10, pressured by soft domestic data, policy uncertainty and rising geopolitical strain. China’s targeted restrictions on Japanese tourism have added to concerns over near term growth.
Japan’s latest quarterly figures showed a 1.8 per cent annualised contraction and a softer than expected deflator, weakening the case for a December Bank of Japan rate hike. Speculators continue to drive USD/JPY higher and test the Ministry of Finance’s tolerance. Verbal warnings have had limited impact. Direct intervention appears more likely after a dollar negative catalyst rather than pre-emptively. Any meaningful defence may lie closer to 160, leaving room for additional upside pressure.
Looking Ahead
The run in to year end is set to be shaped by incomplete data, divided central banks and elevated volatility. The dollar stands to benefit from this environment, while other major currencies respond to their own domestic challenges. At the same time, large scale investment in AI infrastructure continues to provide a structural buffer against broader macro uncertainty. Markets now turn to the next data releases, limited as they may be, to refine positioning ahead of December’s key policy meetings.
