• USD Strengthens: The DXY index holds gains as US rate cuts for December become less likely, with only 8bps of easing priced in. USD deposits offer attractive yields, boosting demand for USD assets.
• Geopolitical Tensions Weigh on EUR: Escalating conflict in Ukraine and rising energy prices put pressure on the euro, with EUR/USD likely to remain in the 1.05-1.06 range.
• ECB’s Debate on Tariffs: ECB officials discuss the inflationary impact of potential US tariffs, adding uncertainty to the euro’s outlook amid wide EUR/USD swap differentials.
• GBP Struggles Despite Inflation Data: The pound weakens as UK inflation exceeds expectations, diminishing the likelihood of further rate cuts by the Bank of England.
• BoE Mixed Signals: BoE Governor Bailey favors a gradual easing approach, while Deputy Governor Ramsden suggests more aggressive rate cuts could be considered if disinflationary pressures emerge.

USD: Dollar Stays Strong Amid Changing Rates and Global Uncertainty
The DXY dollar index is holding firm, reflecting a shift in market expectations. US rate cuts in December are now less likely, with only 8 basis points of easing priced in. One-week USD deposits, offering a competitive 4.61% annual yield, continue to attract investors and corporates. Additionally, concerns about overseas economies and the prospect of a Trump 2.0 presidency support the dollar’s strength.

On Monday, there was caution around the potential impact of the next US Treasury Secretary appointment. However, betting markets now suggest Kevin Warsh, a former Fed member, as the front-runner. His steady leadership during the 2008-09 financial crisis makes him a reassuring candidate for markets.

Today, US data is unlikely to stir the markets significantly. However, any rise in weekly jobless claims could hint at a softer November jobs report, due on December 6. For now, expect the DXY to trade in the 106-107 range, with eyes on developments in Ukraine and comments from European policymakers.

EUR: Geopolitical Tensions and Tariff Concerns Weigh on Euro
EUR/USD remains under pressure, driven by escalating conflict in Ukraine and its impact on European energy prices. Heightened tensions, coupled with increased US support for Ukraine, have spurred concerns about Russia’s response and pushed natural gas prices higher. Europe’s gas reserves, now slightly below their five-year average, add to the strain on the euro.

Meanwhile, the ECB debates the inflationary risks posed by Trump’s potential tariffs, with hawks emphasizing the possible impact and doves urging caution. With 30 basis points of easing priced for December, the euro remains vulnerable. Weak flash November PMI numbers across Europe could keep EUR/USD stuck in its 1.05-1.06 range.

In the EUR/CHF market, the pair continues to trend lower, hovering near 0.93. Expectations of further ECB rate cuts into 2024 could push EUR/CHF toward 0.92, though surprises from the Swiss National Bank on negative rates remain a potential risk.

GBP: Inflation Data Clouds Pound Outlook
The pound struggled on Thursday, despite fading expectations of a December Bank of England (BoE) rate cut. Higher-than-expected UK inflation data for October complicated the outlook. Headline inflation exceeded the BoE’s 2% target, while core and services inflation also surged, aligning with the Monetary Policy Committee’s (MPC) earlier forecasts of 2.4%-2.5% for the next two months.

BoE Governor Andrew Bailey advocates a cautious, gradual approach to easing policy, consistent with November’s 25 basis point rate cut to 4.75%. In contrast, Deputy Governor Dave Ramsden struck a more dovish tone, suggesting openness to faster rate cuts if disinflationary trends become clearer.

Looking ahead, investors will closely monitor October retail sales and November PMI data, due Friday, for clues on the UK’s economic trajectory.