Post-Thanksgiving Quiet, Dovish Shifts, and GBP Resilience.

• USD Activity Limited Post-Thanksgiving: US markets reopen with subdued trading, digesting dovish European sentiment after soft German inflation. Divergence between US and European monetary policies remains in focus.
• Brazilian Real Under Pressure: The BRL hit record lows following underwhelming fiscal reforms, with markets expecting further weakness, especially if the USD strengthens.
• EUR Weighed by Weak Inflation Data: Softer-than-expected German inflation increased market expectations for ECB rate cuts, pushing EUR/USD lower toward 1.050 amid mixed central bank signals.
• GBP Gains on Carry Trade Appeal: The pound strengthened against the euro and dollar, benefiting from the UK’s high interest rates and low market volatility.
• BoE Expected to Hold Rates: The Bank of England’s gradualist approach to rate cuts supports GBP resilience, contrasting with expected ECB rate reductions in December.

USD: A Quiet Return Post-Thanksgiving with Diverging Trends
After Thursday’s Thanksgiving holiday, the US market reopens today with limited activity expected. With no major data releases, markets may still digest the dovish European sentiment sparked by softer German inflation figures. Wednesday’s Core PCE data highlighted the growing divergence between Europe and the US. Meanwhile, the DXY slightly rebounded yesterday, recovering a portion of Wednesday’s losses, buoyed by hawkish remarks from ECB policymaker Isabel Schnabel. Today, further corrections and a return to pre-holiday trends are anticipated as global markets lean dovish, while the Fed’s December rate decision remains uncertain.

Elsewhere, the Brazilian real hit a record low after the government’s fiscal reform proposal fell short of market expectations. Investor sentiment turned more negative, driving up short positions on the real, which closed above 6.000 against the USD. Pressure on the currency is likely to persist, especially if the dollar strengthens. Brazil’s finance minister hinted at possible revisions to the fiscal package following discussions with President Lula.

EUR: Weaker German Inflation Fuels Euro Decline
German inflation data came in below expectations, stagnating at 2.4% year-on-year instead of the anticipated 2.6%. This reinforced market expectations for a 50bp ECB rate cut in December. While market pricing shifted modestly, longer-dated rates rallied. Eurozone inflation data is due today, with downside risks in focus. ECB comments remain mixed, reflecting uncertainty about future monetary policy.

Although some policymakers, like Klaas Knot, emphasize ignoring supply shocks, others, including Francois Villeroy, signal room for rate cuts. Following Schnabel’s hawkish comments, the market is moving dovish, likely weighing on the euro. EUR/USD retreated from levels near 1.060, and further declines toward 1.050 are expected as the US market regains momentum.

GBP: Pound Gains on Low Volatility and Yield Advantage
The British Pound strengthened against the euro and dollar, with GBP/EUR testing the upper bounds of recent ranges at 1.2030 and GBP/USD rallying to 1.2743. The pound benefits from a low-volatility environment that supports carry trades, thanks to the Bank of England’s cautious approach to rate cuts.

Analysts highlight the UK’s yield advantage as a key driver of sterling’s performance. With the BoE expected to maintain rates in December while the ECB cuts further, the pound remains well-positioned. Expectations for a gradual rate-cutting cycle by the BoE, starting in February, support a bullish outlook for GBP in the near term.