GBP: Sterling exhibited resilience against both the euro and USD, maintaining stability despite a mixed UK jobs report. While headline employment data showed strength, concerns emerged with wage figures, indicating a slim chance of wages surpassing the 8% mark. This situation bodes well for the Bank of England’s (BoE) ongoing battle against inflation. Notably, job vacancies continued their decline, marking the 17th consecutive period of reduction, as reported by the Office for National Statistics. Despite this, interest rate expectations for the BoE remain unchanged, with markets anticipating approximately 75 basis points of cumulative rate cuts by December 2025, and the first cut potentially taking place around June/August. The upcoming BoE rate decision is expected to see Governor Andrew Bailey maintaining a stance against rate cuts, adhering to the ‘higher for longer’ narrative, which could provide support for the pound.

USD: The week ahead promises increased volatility in currency markets, primarily driven by a slew of critical economic releases. Of particular significance is the eagerly awaited U.S. inflation report scheduled for this morning. In recent weeks, U.S. interest rate expectations have shifted lower, driven by speculations that the Federal Reserve might aggressively cut borrowing costs in the coming year. However, this scenario hinges on inflation rapidly approaching the 2.0% target. The U.S. Bureau of Labor Statistics is set to unveil November’s inflation numbers, with estimates suggesting a flat headline Consumer Price Index (CPI) and a 0.3% month-on-month increase in the core gauge. The outcome of this report will play a crucial role in validating the dovish monetary policy outlook anticipated by Wall Street. Should the data indicate a satisfactory moderation in the cost of living, it could strengthen the case for the Federal Reserve’s dovish stance. On the contrary, a failure to do so might trigger a hawkish repricing of interest rate expectations, leading to a surge in U.S. Treasury yields and bolstering the U.S. dollar.

EUR: The euro initiated the week with a relatively flat performance as markets brace for central bank decisions and supplementary data releases. European Central Bank (ECB) interest rate expectations have experienced a dovish repricing, influenced by recent eurozone data. Contrastingly, the Federal Reserve may adopt a more cautious approach to significant rate cuts due to the relative resilience of the U.S. economy, a notion reinforced by the robust Non-Farm Payrolls report from the previous week. According to current market sentiment, the first ECB cut is anticipated around March/April next year. In contrast, Goldman Sachs suggests that the Federal Reserve might implement its first rate cut in Q3 2024, deviating from their earlier Q4 2024 projection. In summary, the economic disparities between the euro area and the U.S. could potentially exert downward pressure on the euro in the foreseeable future.