The dollar has grabbed alot of attention recently, with eight straight weeks of gains and fresh two-year highs last week. That means some of its peers, like EUR, GBP and NZD, have recently broken down through long-term support levels. Thats said, today is seeing a reversal of this trend due to the announcement of Scott Bessent as US Treasury Secretray. He is seen as a ‘voice of reason’ in the new administration and a recent caller of tariff gradualism . Longer-term, there are several reasons for the ongoing strength in the greenback. These include a recent haven bid due to escalation in the Ukraine-Russia conflict and hawkish Fed speak on the back of sticky inflation. Still solid US data also contrasts with crumbling confidence in the eurozone.
It’s Thanksgiving in the US on Thursday so both stock and bond markets close early. That likely means most of the week’s developments will be squeezed into the first half of the week before global markets enter a generally lighter period absent US clients and a significant amount of liquidity. The Fed’s favoured inflation gauge is expected to tick up with the core PCE monthly print higher than the 0.17% reading that is needed to bring CPI back to target. This would match the estimates that Fed Chair Powell shared recently. There is one more CPI report following NFP, ahead of the FOMC December 18 meeting. That rate decision is currently more or less a coin flip as to a pause or 25bps cut.
Eurozone inflation is also predicted to move higher, mainly due to base effects. The eurozone economy is battling stagnation, potential Trump tariffs, political uncertainty and a ramping up of a conflict on its borders. It seems tough to call a bottom in the euro, even after a near 7% decline since late September and today’s small rebound. Markets are betting on a 50bp rate cut by the ECB next month, after the odds increased sharply on the very disappointing PMI data on Friday. The October 2023 low in EUR/USD is a key long-term level at 1.0448.
Finally, Thursday sees Tokyo CPI data. A modest gain toward 2% in core inflation is likely. These figures are seen as a forerunner for nationwide inflation. It will be the last report before the BoJ meeting on December 19. Governor Ueda recently indicated that this meeting is to be treated as ‘live’. Interestingly, JPY is starting to show a little strength on the crosses, helped by the change in the fiscal-monetary policy mix. The Liberal Democratic Party (LDP) has had to bring the Democratic Party for the People (DPP) into the governing coalition and agree to measures which add up to a $250bn fiscal stimulus package. At the margin, this could push the BoJ to hike rates in December after all, with around 15bp now priced in, so a 60% chance of a move. Looser fiscal and tighter monetary policy is usually a supportive mix for a currency.