November 18, 2024

“The combination of some hawkish Federal Reserve commentary and the continued ‘Trump trade’ lifted the dollar another leg higher this week. The focus for markets now is UK inflation and the growth picture for Europe and the US.”

Tim Hallinan – Trading Director

USD

The dollar gained 1.6% last week, as Fed Chair Powell injected some uncertainty around the pace of future rate cuts and the political newsflow convinced markets that the Trump administration would be well-prepared to forcefully implement his policy offering in January. These tailwinds likely aren’t going anywhere this week, although a pullback is certainly possible if the rally becomes overstretched. The implied probability on a December cut is back down to 40% and another rate cut is now no longer fully priced until the March meeting. There are two main things to watch on the domestic side this week: Friday’s PMIs and Trump’s pick for Treasury secretary. The activity data is expected to broadly confirm the strong US economic momentum into the fourth quarter.

GBP

Sterling’s week will hinge on Wednesday morning’s services inflation print. The pound took a knock from Friday’s softer-than-expected GDP report, but caution at the Bank of England is keeping it relatively well supported. The consensus is looking for another 4.9% services inflation figure, which for now should keep the market fixed on a quarterly pace of rate cuts that sees the BoE continuing to lag behind the ECB in terms of monetary easing. GBP/EUR is trading below the 1.20 handle this morning, but it will likely take some stronger disinflation in the core services inflation components to drive the next leg lower.

EUR

1.05 proved to be some strong resistance for the euro last week, and EUR/USD is lifting slightly higher this morning ahead of some key PMI data on Friday. Remember that it was weakness in the PMIs that convinced the ECB to accelerate the pace of rate cuts last month, and another soft print on Friday could start to convince investors about a 50bp cut in December. The 0.4% Q3 growth figure will soothe growth worries to some extent, but the recent softness in the surveys will be hard to ignore if we drop below the 50.0 mark again. For today, we get speeches from Guindos and Lagarde.

Markets

The post-election gains in the US equity markets faded significantly last week. On Friday alone, the S&P 500 fell 1.3% and the Nasdaq dropped by 2.2% after Fed Chair Powell became markedly more hawkish on Thursday night, as he argued that the US economy’s strength could warrant a more careful pace of rate cuts. The biggest event for stocks this week is Wednesday’s Nividia earnings release – its stock is responsible for around 25% of the S&P’s gains this year.

Main Economic Events (All Times CET)

9:00am: ECB’s Guindos speaks
7:30pm: ECB President Lagarde speaks

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