Markets Steady as USD Defies December Doldrums.

• Strong PMIs contrast with weak manufacturing; Fed expected to hold a cautious tone.
• Political turmoil from Freeland’s resignation and trade concerns weigh on CAD.
• Improved eurozone PMIs offset by Germany’s manufacturing softness and fiscal uncertainty.
• Accelerating private sector wages fuel BoE hawkish expectations, boosting GBP.
• USD holds firm, CAD faces headwinds, EUR stagnates, and GBP strengthens as markets focus on the Fed.

USD: Bucking the Seasonal Slump Yesterday’s composite PMIs delivered stronger-than-expected results across major developed markets, though manufacturing displayed clear signs of slowing on both sides of the Atlantic. The currency market remains cautious on monetary policy implications, with dollar pairs stabilizing in their current ranges ahead of next week’s key macroeconomic events before the holiday break.

In the US, today’s November retail sales are projected to show a solid reading, though its impact on tomorrow’s FOMC communication will likely be minimal. Data volatility, partly due to extreme weather effects, clouds its signal. Market consensus remains firm on a 25bp rate cut, which aligns with our view.

We anticipate a wait-and-see mood in the market today, favoring consolidation of the dollar’s recent gains. Unless the Federal Reserve strikes a surprisingly dovish tone (which we deem unlikely), the 2-year USD OIS rate hovering near 4.0% remains the key factor offsetting December’s typical dollar softness.

Meanwhile, in Canada, political turmoil has weighed on the loonie. Finance Minister Chrystia Freeland’s resignation—stemming from clashes with PM Trudeau over Trump’s tariff threats—has prompted Dominic LeBlanc’s nomination as successor. Although USD/CAD surged on the news, we suspect the rally may stall beyond 1.430 unless the Fed delivers a major hawkish surprise. Seasonal and technical signals suggest overextension for now, but Canada’s outlook for 2024 remains bleak. A shift toward 1.45+ remains a tangible risk should Trump impose 25% tariffs on Canadian goods.

EUR: Fiscal Optimism Still a Long Shot for the Euro Eurozone PMI data surprised to the upside, climbing into expansion territory (51.4) thanks to robust services activity. However, manufacturing remains weak, and Germany’s disappointing 47.8 composite PMI underscores the ongoing struggles for the bloc’s largest economy.

This has sparked speculation about increased fiscal stimulus, especially following yesterday’s no-confidence vote that sets the stage for German snap elections in two months. Yet, markets may remain cautious until there’s more clarity on bending Germany’s strict fiscal rules. For now, the European Central Bank’s easing stance remains front and center.

Today’s Ifo and ZEW surveys may move the needle slightly, but proximity to the FOMC meeting likely keeps EUR/USD pinned near 1.0500 for the day.

GBP: Hot Wages Fuel Sterling Strength This morning’s UK labor data delivered hawkish signals for the Bank of England, boosting the pound. Employment slowed modestly to 173k in October (vs. 5k expected), though this measure remains somewhat unreliable. The unemployment rate held steady at 4.3%.

What matters most is the unexpected wage acceleration. Both headline weekly earnings and the ex-bonus measure surged above 5.0%, driven largely by private sector wage growth—where pay trends reflect broader economic strength. Private sector wages grew at an annualized pace of 12% month-on-month, offering fresh ammunition for hawkish voices on the Monetary Policy Committee.

While there are signs of a cooling jobs market—e.g., vacancies remain below pre-Covid levels—today’s wage data supports the case for further sterling gains. EUR/GBP looks poised to stay below 0.830 in the near term, with risks still skewed to the downside as the BoE holds steady this week, highlighting its clear divergence from the dovish ECB.