Dollar Dominance: A Week of FX Dynamics and Policy Decisions.
- Dollar Resilience: Despite a softer US jobs report, the DXY index stayed strong, supported by geopolitical uncertainty and attractive USD deposit yields at 4.6%.
- G10 Rate Cuts: Central bank meetings in the eurozone, Switzerland, and Canada may bring rate cuts, with Canada likely opting for a 50bp reduction, while the Fed remains slower to adjust.
- US CPI in Focus: November’s CPI data on Wednesday is crucial, with a core reading of 0.4% potentially questioning the Fed’s expected 25bp rate cut on December 18.
- Euro Weakness: EUR/USD faces renewed pressure ahead of Thursday’s ECB meeting, where a 25bp cut is likely, alongside potential hints of sub-neutral rates for next year.
- Steady Pound: GBP/USD holds above 1.2700 as Fed rate cut bets rise to 83%, with upcoming US CPI data and cautious Fed signals adding uncertainty.
Friday’s US Jobs Report and Dollar Resilience
The dollar remained resilient after Friday’s softer US jobs report, with the DXY index finding solid support below 106. Geopolitical uncertainty, including regime changes in Syria and volatility in Korean politics, adds slight tailwinds for the dollar. Additionally, attractive one-week USD deposit yields of 4.6% bolster demand into year-end.
Key Themes This Week
- G10 Central Bank Rate Decisions:
Major rate cuts are on the horizon, with policy meetings in the eurozone, Switzerland, and Canada. While a 50bp cut in Canada appears likely, other central banks are expected to tread cautiously. In contrast, the Federal Reserve’s slower pace of rate adjustments keeps USD interest rate differentials favorable. - US Economic Calendar:
November’s CPI report on Wednesday takes center stage, with expectations of a 0.3% core month-on-month increase. A higher reading (0.4%) could challenge the Fed’s plan to cut rates by 25bp at its December 18 meeting. Additional market focus includes the NFIB Small Business Optimism Index, which could provide marginal dollar support.
The dollar is poised to maintain its bullish trajectory, with the DXY likely trading within the 106.00–106.70 range.
EUR: Renewed Pressure Ahead
The euro struggled to sustain gains above 1.06 after the US jobs report. Focus shifts to Thursday’s European Central Bank meeting, where a 25bp cut appears probable. Discussions may hint at sub-neutral policy rates for next year amid limited optimism for the eurozone.
For now, EUR/USD is expected to resume its downward trend, targeting 1.0500–1.0520 in the short term, with potential for further declines depending on US CPI data and the ECB’s tone.
GBP: Holding Ground Near Key Support
The pound remains steady above 1.2700 against the dollar despite increasing bets on a Fed rate cut next week. The probability of a 25bp reduction has risen to 83%, fueled by November’s robust US jobs data. While the dollar remains unfazed by easing expectations, GBP/USD stability could waver if upcoming CPI data provides fresh momentum for the greenback.
Inflation data on Wednesday will be pivotal, with headline CPI expected at 2.7% and core CPI at 3.3%. Market speculation remains cautious as Fed officials, including Governor Michelle Bowman, signal a gradual approach to rate reductions.