• USD: Geopolitical tensions from the Ukraine conflict have had limited FX impact, with the dollar’s overbought status tempering gains. USD/JPY breached 155.0, while safe havens JPY and CHF saw only brief support.
• Market Sentiment: European currencies (excluding CHF) remain most vulnerable to escalation, while distant high-beta currencies like CAD and AUD are indirectly affected. JPY could see a significant rebound if tensions worsen.
• US Economic Outlook: Light calendar focus on Fed speakers, with state payroll data hinting at a potential 100k technical rebound in November jobs. Geopolitical risks are balancing dollar positioning, possibly easing the path for further gains.
• EUR: Dovish ECB signals from Fabio Panetta align with expectations for quicker policy easing. Wage data today may hold little sway over markets, with EUR/USD risks tilted towards a test of 1.050 and a possible year-end drop.
• GBP: Slightly higher UK CPI and stable services inflation (5.0%) reduce the chances of a December BoE rate cut. February remains the likely timeline, with EUR/GBP expected to drop below 0.830 in the short term.

USD: Geopolitical Jitters Meet Dollar’s Overbought Status

The Russia-Ukraine conflict intensified with Ukraine’s use of US-supplied long-range missiles targeting Russian territory, prompting Moscow to lower its nuclear response threshold. Yet, the FX market reaction has been muted, likely due to the dollar’s overbought positioning, which may have tempered gains tied to geopolitical tensions. Other safe-haven currencies like JPY and CHF saw only brief support, with USD/JPY climbing back above 155.0 this morning.

For now, markets seem to adopt a cautiously optimistic stance on Ukraine. Any further escalations, however, could ripple deeper through FX markets. European currencies (aside from CHF) remain most exposed, while geographically distant high-beta currencies like CAD and AUD are only indirectly at risk through general market sentiment. A heightened JPY rebound remains plausible in case of further conflict escalation.

Domestically, the US economic calendar is light, with attention on Fed speakers such as Barr, Cook, Williams, and Collins. Yesterday’s state payroll data, reflecting the impact of hurricane-related disruptions, hinted at a possible November rebound in jobs numbers. Our analysis suggests at least 100k in technical job growth, setting a higher bar for a hawkish Fed surprise.

Although we previously flagged a potential dollar correction, recent geopolitical risks appear to have balanced the scales. A renewed dollar rally may now face less resistance.

EUR: Wage Data in Focus Amid Dovish ECB Stance

ECB dove Fabio Panetta emphasized the central bank’s role in fostering eurozone growth, signaling a shift from inflation-fighting to economic support. This dovish sentiment aligns with our view that the ECB is likely to ease policy sooner than markets currently expect.

Today, the ECB releases 3Q wage data. While this was once a key policy input, it holds less sway now due to confidence in disinflation trends. A major upside surprise in wages could bolster hawkish arguments, but we anticipate little impact on ECB pricing or the euro.

Despite initial expectations of support for EUR/USD, downside risks have re-emerged due to geopolitical concerns and the eurozone’s rate disadvantage. A test of the 1.050 level appears likely, with a potential break lower by year-end.

GBP: Inflation Data Reduces Odds of December Rate Cut

Sterling climbed past 1.270 against the dollar following hotter-than-expected UK CPI data for October. While headline and core inflation ticked higher, the Bank of England’s focus remains on services inflation, which rose modestly from 4.9% to 5.0%. However, core services inflation—a key metric—actually decelerated to 4.5%.

This deceleration likely delays a December rate cut. Even with another inflation print ahead of the BoE meeting, a significant slowdown in services inflation would be required to revive prospects of easing. We anticipate a steady 5% services CPI for the next few months, with sharper declines only starting in Q2 2025.

Our base case is for the next BoE rate cut in February, which remains underpriced by markets. This could weigh on sterling next year, particularly against a dovish ECB, though EUR/GBP is expected to dip below 0.830 in the near term.