US SME Optimism Surges to 44-Year High
The US dollar rose for a third consecutive day as sentiment among small businesses turned positive, according to the first data release since Donald Trump’s election victory. Investors are now awaiting significant Treasury auctions over the next two days, alongside the crucial inflation report due later today.
Trump has long been viewed by investors as favourable to small and medium-sized enterprises (SMEs) in the United States. This perception has been evident throughout 2023 and 2024, during which the small-cap equity index Russell 2000 closely mirrored Trump’s rising election odds. One particularly well-received initiative was the 20% business tax deduction introduced during his first term. The sharp rise in SME sentiment following his re-election suggests smaller firms are prepared to overlook planned tariff increases and are instead focusing on the promised reduction of bureaucracy and deregulation initiatives. While actual sales figures remained unchanged in November, the outlook for general business conditions over the next six months soared to a record high, as per the NFIB survey published this week.
Attention now turns to the Consumer Price Index (CPI) report later today. Economists anticipate another strong monthly increase of 0.3% for November, matching October’s gain. The annual core inflation rate is expected to remain steady at 3.3%, while headline inflation may edge higher from 2.6% to 2.7%. Investors are likely to scrutinise the data closely, even though market volatility has declined markedly since 5 November—more so than is typical following presidential elections.
Pound Reaches Strongest Level Against Euro Since 2022
The pound has outperformed its G10 counterparts for much of 2024, buoyed by a UK economy that has proven more resilient than expected and expectations that the Bank of England (BoE) will adopt a cautious stance on cutting interest rates. This contrasts starkly with Europe, where economic growth has been lacklustre and the European Central Bank (ECB) has maintained a dovish policy. Consequently, GBP/EUR has climbed above €1.21, its highest level since March 2022.
The divergence between the BoE and ECB is expected to persist through 2025. Markets currently price in just three rate cuts by the BoE compared to six for the ECB. As a result, the yield spread between UK and German bonds has widened from 120 basis points to over 220 basis points in just a few months. Simply put, the pound offers a more attractive yield than the euro. Adding to the euro’s challenges are European political uncertainties, while the UK’s goods trade deficit with the US renders it less vulnerable to Trump’s tariff policies than the Eurozone.
Canadian Dollar Weakens Ahead of BoC Decision
The Canadian dollar fell to a four-and-a-half-year low against the US dollar yesterday, ahead of today’s Bank of Canada (BoC) policy decision. While a 25 basis point rate cut is fully priced in, 80% of swap traders now anticipate a larger 50 basis point reduction.
Last week’s disappointing Canadian employment data tilted expectations further in favour of a 50bp cut. This has driven USD/CAD up by over 1%, briefly surpassing the C$1.42 mark—its weakest level since April 2020. Widening rate differentials between Canada and G10 peers such as the US and UK have also contributed to this decline, with both the US dollar and particularly sterling on track to post their largest yearly gains against the Canadian dollar since 2015. Additionally, Canada’s sizeable trade surplus has placed it in the crosshairs of Donald Trump, whose tariff threats are weighing on both the Canadian dollar and the broader economic outlook.
While risks to the Canadian dollar remain tilted to the downside, a relief rally could materialise if policymakers adopt a less dovish stance than expected. In such a scenario, a pullback towards the C$1.40 level could occur. However, a move higher towards C$1.45 appears unlikely unless Canada faces significant tariff impositions from Trump in 2025.