Shifting Dynamics in the UK, US, and Eurozone.

The UK’s GDP for November 2023 exceeded forecasts, driven by a robust services sector and slight improvements in production output. However, the focus now turns to the final quarter, with worries about whether increased festive season spending can avert a technical recession. Although Q3 GDP contracted by 0.1%, and Q2 remained flat, the broader economic challenges have persisted since 2022. Chancellor of the Exchequer Jeremy Hunt addressed these issues in the previous year’s Autumn Statement. Despite the positive data, the pound’s performance against the US dollar showed limited change, leaving uncertainties about its momentum in the coming weeks.

In the US, the December Consumer Price Index (CPI) report surpassed expectations, with the all-items index rising to 3.4% from the previous 3.1%. Jobless benefit applications reached a three-month low, indicating strong resilience in the labor market. With inflation comfortably exceeding the Fed’s 2.0% target and minimal layoffs, the central bank is hesitant to make significant interest rate cuts in 2024, defying market expectations. Although Treasury yields dropped, this might be linked to safe-haven demand amid reports of potential airstrikes against Houthi rebels in Yemen. Geopolitical risks, while present, are expected to remain contained, allowing yields to likely resume an upward trajectory after uncertainties settle.

The Euro to Dollar exchange rate has displayed resilience but faces potential repricing as Federal Reserve rate cut expectations evolve. While 2024 has seen reduced odds for a March rate cut, a 65% probability remains, leaving room for further adjustments. Analysts suggest the Euro-Dollar pair may experience a shift in its recent range-bound trade if rate cut expectations decrease. Technical signals indicate a possible reversal, with risks leaning towards corrective weakness in the mid to upper 1.07s. Despite difficulties breaking above 1.10, the Euro-Dollar pair continues to navigate the 1.09-1.10 band, with a looming resistance level between 1.1040 and 1.1050.