Hawkish Notes, Dollar Strength, and Global Currencies.

• USD Strength Supported by Powell’s Remarks: Hawkish comments from Fed Chair Powell emphasized economic resilience, reducing expectations for a December rate cut and bolstering the dollar’s position.
• Inflation Keeps Fed Dovish Pivot in Check: October’s CPI and PPI core inflation rose 0.3% month-on-month, too high for the Federal Reserve to adopt a softer stance, sustaining cautious market sentiment.
• EUR/USD Under Pressure Near Key Support: EUR/USD remains bearish, testing 1.050 as markets anticipate a potential 50bp ECB rate cut in December amid growing growth concerns.
• UK GDP and Inflation Signal Moderate Growth: Weaker Q3 GDP growth reflects underlying economic softness, with the BoE focusing on sticky services inflation ahead of likely December rate policy.
• EUR/GBP Faces Downside Risks: The rate differential favors GBP as limited upside is expected for EUR/GBP, with the ECB leaning dovish and the BoE likely pausing in December.

USD: Powell’s Cautious Confidence Boosts the Greenback

The dollar remains buoyant, testing the limits of stretched positioning, as macroeconomic events have yet to ignite a significant pullback in bullish dollar bets. October’s inflation data has kept traders cautious, with both CPI and PPI core measures rising 0.3% month-on-month—too high for the Federal Reserve to pivot to a dovish stance.

Fed Chair Jerome Powell’s remarks in Dallas yesterday reinforced this sentiment. Highlighting the robust economy, Powell emphasized a “careful” approach to future policy decisions, leading markets to slightly reduce expectations for a December rate cut, now priced at 15bp. The comments lent support to the dollar, particularly during the latter part of the New York session.

October retail sales data, due today, could prompt a dollar correction. A modest slowdown is expected across retail sales indices, though they are likely to remain in positive territory month-on-month. While this could weigh on the dollar, recent momentum in US economic data suggests resilience.

Our short-term outlook anticipates a dollar correction, though we remain cautious about extending its rally. Looking ahead, policies under incoming President Donald Trump may strengthen the structural case for a strong dollar.

EUR: Pressure Mounts Near 1.050

EUR/USD tested the critical 1.050 level yesterday before a brief rebound ended with renewed selling pressure around 1.0580. With stretched dollar positioning, intraday volatility is expected to persist, but the pair’s bearish momentum continues to attract sellers during rallies.

Minutes from the European Central Bank’s October meeting revealed ongoing debates about disinflation. While some hawkish members hesitated on a “risk management” rate cut, growth concerns have gained prominence in the Governing Council. We still foresee a 50bp rate cut in December, which could weigh further on the euro, as markets currently price in just over 30bp.

Today’s speeches from dovish ECB members Fabio Panetta, Philip Lane, and Piero Cipollone will be closely watched. The 1.0500 level remains a key support for EUR/USD, supported by positioning dynamics. However, our year-end target remains 1.040.

GBP: Subdued Growth and a Soft EUR/GBP Outlook

The UK economy faltered in September, dragging third-quarter GDP growth to 0.1%, down from 0.7% and 0.5% in the first two quarters. While the slowdown is evident, much of the earlier growth came from sectors less reflective of core economic health. The Bank of England acknowledges slower growth earlier in the year and expects a moderate pace in the near term, with some budgetary support likely to boost GDP next year.

The BoE is less concerned about GDP volatility and more focused on next week’s services inflation data, which is expected to stick around 5%. Unless inflation surprises to the downside, a December pause appears likely.

EUR/GBP remains just above 0.830, constrained by a wide rate differential. With a BoE pause and our expectation of a 50bp ECB cut in December, significant EUR/GBP upside before year-end seems unlikely.