January 03, 2025

“Yesterday was a strong illustration of what can happen when liquidity is low. The dollar carried through its momentum from Q4 and surged to a two-year high without any immediate catalysts for the move.”

Sam Cornford – Head of Trading

USD

The dollar took its strong momentum into the new year yesterday with a 0.7% jump and a two-year high. The one relevant piece of data – unemployment claims – was relatively strong at 211K, but there were no major data surprises or movements in rate spreads to catalyse the move. Instead, the bulk is likely down to some combination of still-low liquidity, new year capital flows, rising natural gas prices in Europe, and a sharper focus on Trump’s return to the White House. The continued upward pressure on USD/CNY prompted the People’s Bank of China to allow a push through the 7.30 mark. Today, the ISM manufacturing index is expected to remain quite steady at 48.2 and we get a speech from the Fed’s Barkin ahead of a raft of labour market data next week.

GBP

Sterling was the worst performer in the G10 yesterday, sinking below the 1.24 mark for the first time since last April. GBP/USD is another pair where the two-year rate differential has actually moved 20bps in the pound’s favour over the holiday period and yet it has dropped nearly 2% over the past week. This suggests that a recovery is on the cards once volumes return to normal next week, although traders may also wish to choose to keep the extra risk premium in. On the data side, the final figure for the December manufacturing PMI was revised down marginally to 47.0 yesterday, and there are some mortgage approvals data this morning.

EUR

A rallying dollar broke the euro into the 1.02s in a low-volume session yesterday, to levels not seen since the parity episode in late 2022. EUR/USD has been moving in the opposite direction to its rate spread in the last week or two and so it is difficult to gauge the likelihood of the move persisting, but of course these are some strong signs for the dollar heading into 2025. According to Bloomberg calculations based on options pricing, the implied likelihood of the euro hitting parity before the end of the second quarter is now up to 60%. A speech from the ECB’s Chief Economist is the only notable event today and traders will look to inflation figures early next week.

Markets

European stocks bounced yesterday, with the FTSE 100’s 1% rise taking the charge, while US indexes slipped modestly. Tesla stock fell more than 6% yesterday as it posted its first drop in annual deliveries for 13 years. Chinese equities have performed particularly poorly this week as markets look towards Trump tariffs, with the CSI 300 sinking 5%.

Main Economic Events (All Times CET)

9:55am: German Unemployment Change
10:30am: UK Mortgage Approvals
4:00pm: US ISM Manufacturing PMI

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