🇺🇸 USD - Inflation May Stay Hot, Expectations Rise
Starting January, with Donald Trump and the Republican Party in full control of US policy levers, markets anticipate shifts in global currency trends. The new administration's relaxed fiscal policies and stricter immigration controls could lead to higher interest rates in the US, benefiting the dollar. While this may overheat the US economy, the "dollar bubble" has the potential for further growth in 2025. The overall outlook is positive, likely breaking the dollar index’s two-year range. However, there may be obstacles along the way, including trade policy uncertainties.
Today's core CPI for October is expected to rise by 0.3%, with the headline CPI at 0.2%. This should keep markets positioned for the Fed, although additional rate hikes seem less likely, with only 15 basis points priced in for December and 23 for January. If the CPI data comes in slightly below expectations, we may see more of a downside for the dollar than an upside.
If the analysis on CPI holds, the dollar rally might gain slightly, solidifying DXY above 106. However, a short-term correction, like the one on November 7, is likely.
🇪🇺EUR - 1.06 Rate Pressure
The EUR/USD pair remains under strong pressure due to the broad dollar rally. If US core CPI lands at 0.3% MoM, EUR/USD may drop below 1.06. Despite recent declines, 1.06 is close to the short-term fair value, implied by short-term interest rate differentials. The two-year USD:EUR swap rate gap has expanded rapidly to approximately 185 basis points.
We hold a dovish outlook for the European Central Bank (ECB), expecting markets to price in the possibility of a 50 basis-point rate cut in December. Today’s US data is likely to keep EUR/USD volatile, with a bearish outlook remaining.
🇬🇧 GBP - Focus on Catherine Mann’s Speech
Today’s main event for sterling is the speech by Catherine Mann, one of the most hawkish members of the Bank of England's MPC. Markets will focus on her views regarding the recent budget’s impact on monetary policy and the latest employment and wage data. With her likely to emphasize the inflationary impact of increased government spending, she may focus on stable wage figures rather than the recent rise in unemployment.
The GBP curve does not need further hawkish commentary at this stage. Markets see little chance of a rate cut in December and are pricing in only a total of 50 basis points in cuts by September 2025. Weakness in the euro implies that EUR/GBP should remain close to 0.8300.
🏆GOLD - Potential for Growth
Gold (XAU/USD) gained positive traction on Wednesday, reaching $2,589–$2,590 and ending a three-day decline. However, a significant rise in the dollar could put downward pressure on gold. If inflation data is weak, the dollar may ease, supporting gold’s growth. Additionally, stock market declines could favor gold as a safe-haven asset.