November 25, 2024

“The PMIs triggered a huge amount of volatility on Friday and growth weakness in Europe helped to fuel the dollar’s already strong momentum. The result was a two-year low in EUR/USD and a six-month low in GBP/USD. However, the dollar has cooled off slightly on the back of Bessent’s appointment as US Treasury secretary.”

Sam Cornford – Head of Trading

USD

A PMI-related meltdown for the euro sent the dollar index to a two-year high on Friday, but we are now down 0.7% from the peak after Trump’s pick for Treasury secretary has cooled panic around heavy tariffs and a widening fiscal deficit. Macro investor and hedge fund billionaire Scott Bessent is seen as a more mainstream pick than some other options – he is a fiscal hawk with aims to cut the budget deficit to 3%, and he has expressed a preference for ‘layering’ tariffs over time so as to minimise the inflationary impact. The assumption that his appointment means a lower borrowing and inflation profile has weighed on Treasury yields and pulled down the dollar over the past few days. Not all are convinced by that conclusion, however, particularly given that he has outwardly supported a stronger dollar. The focus this week is on the November Fed meeting minutes tomorrow and the Fed-favoured core PCE inflation on Wednesday. Month-on-month inflation is expected at a sticky 0.3%, which would support the market’s leaning towards a rate hold next month.

GBP

Sterling sank to a six-month low on Friday, after PMI data suggested that a post-budget slump in sentiment has dragged the UK economy into contraction for the first time since October 2023. The composite index dropped from 51.8 to 49.9, and firms pointed to the minimum wage and employer’s NI increases as reasons why they were beginning to reduce headcount and up prices to keep margins intact. However, while the markedly poorer outlook for Q4 growth is bad for sterling’s growth differential in the near term, it is worth noting that the Bank of England is far more concerned about services inflation and much less sensitive than the ECB to weakness in the cyclical picture – bets on a cut on December only rose as high as 15%. There are a couple of speeches this morning from Lombardelli, who spoke at the parliamentary hearings last week, and Dhingra, who is a very predictable dove and will likely reiterate her desire to accelerate the easing cycle.

EUR

Friday’s PMIs were much weaker than expected, and the euro fell to a two-year low in a rapid selloff that included a brief period below 1.04. Leading growth indicators have become even more important than inflation for ECB expectations since they prompted a cut in October, and so a 10-month low in activity momentum in November at 48.1 saw rates markets pile in on bets for further easing in December and into 2025. The implied probability for a 50bp move next month is now above 40% from just 15% before the release. The euro’s drop also saw EUR/CHF crash to the lowest level since the SNB’s floor removal in 2015. Inflation releases from Germany and Spain on Thursday and from the bloc on Friday are the main events this week, where base effects are expected to lift the headline to 2.3% but the month-on-month print is expected to be slightly negative.

Markets

In great contrast to the nervous trading in FX last week, global stocks made strong gains. This morning, the choice of Bessent as US Treasury secretary has futures in Europe pointing to a strong open, too, as markets laud the appointment of a more mainstream candidate who will likely be less aggressive on the tariff side.

Main Economic Events (All Times CET)

10:00am: German ifo Business Climate

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