·         US companies started to cut hiring in November, with the private sector reducing employees to the lowest level since 2022, adding further evidence that the job market is cooling. The key focus will now be on Friday’s Payrolls data.

·         Fed Policymakers now head to the final meeting of the year next week and no changes are expected to the federal funds rate.

·         The US Dollar is losing against major peers, with the Dollar Index trading lower at 104 following news out of Japan.

·         The Yen has rallied against all its peers after Bank of Japan Governor Kazuo Ueda stating that his job may become more challenging after year-end, and markets now bet on a 45% chance that the BOJ will terminate its negative interest rate policy this month.

·         This is the first-time the Governor makes comments that are not related with the need and motives for further easing.  The Yen strengthened 1% against the greenback with USD/JPY just breaking through 146, after starting the day above 147.

·         The euro consolidates mid 1.07-1.08 since yesterday with the ECB dovish tone leading the way. The central bank has finished its tightening policy unless data surprises arise, but markets have now priced 150bps of cuts for the upcoming year.  Next Resistance is seen at 1.0920 and next support around 1.0760.

·         BOE’s Governor Andrew Bailey still suggests that interest rate cuts are unlikely for the near future and reassures the need for interest rates to stay higher for longer. Concerns about the stickiness of inflation in the service sectors remain and Bailey expects CPI to be just below 4% by the end of the first quarter of 2024.

·         Cable trades at 1.2579, certainly benefiting from a weaker US Dollar, jumping from today’s low at 1.2546. Big support levels seen between 1.2470-80 and first resistance seen near 1.2750.

The USD continues to recover ground from the low point on Monday, with small support from the slightly stronger November ISM overnight (52.7 vs an expected 52.3). Later today we will see the ADP employment data which will be used as a measure leading into the important Friday’s Nonfarm Payrolls. GBP/USD has traded through 1.2600 during Asia which has been providing support over the last week only to move back through the level. EUR/USD continues to make new lows each day after the high of 1.1017 last week. The pair is currently at 1.0795.

The UK Services and Composite PMIs for November were both stronger than expected yesterday (50.9 vs 50.5 and 50.7 vs 50.1 respectively). The same trend has seen yesterday in the Eurozone across each of the major economies, Services PMI 48.7 vs 48.2 and Composite 47.6 vs 47.1. Today we will see the release of German Factory Orders with a 0.2% increase expected for October.

Moody’s Investor Service cut its outlook on Chinese Sovereign Bonds yesterday from stable to negative. The PBOC set a stronger fixing rate in the spot market today to prevent declines in the currency as a result. ECB board member Schnabel said another rate hike probably won’t happen following a “remarkable” slowdown in inflation. Schnabel has been viewed as both influential and hawkish of late. Yields traded lower on the comments (amount 8 basis points in the 2-year pillar) and the market is now pricing between five and six cuts by the central back over the year ahead.

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·         The month of November ended with a range of data suggesting the US economy is cooling at a fast pace leading to well-known Fed hawks changing their tone into a more dovish one in public remarks.

·         Inflation surprised to the downside, indicating that it is on track to the Fed’s 2% target – Monthly core inflation dropped to 0.2% in October and Annual Core PCE was released at 3.4%, below 3.7% FOMC forecast.

·         Treasuries rallied throughout last week on the soft data, and markets now price a 50% chance of a first rate cut in the first quarter of 2024.

·         Key data/events to watch this week in the US: JOLTS (Tue.); ISM Services (Tue.) is likely to keep cooling in November, but still expanding (greater than 50.0); Unemployment Rate (Fri.) is expected to increase to 4.0%; Non-Farm Payrolls (Fri.) is estimated to improve after the United Auto Workers strike was resolved.

·         The lack of confidence by investors in the Euro-area recovery is clear with EUR/USD struggling to keep above 1.10 last week, and dropping all the way towards 1.0860, where we currently sit. Last week’s CPI data confirmed that the ECB won’t be able to afford any further interest rate hikes, and the market now expects the central bank to hold and remain cautious, but swap markets expect the first 25 bp cut to be around April next year.

·         Key data/events to watch this week in the Euro-area: Germany Industrial Production MoM (Thu.), will offer better insight into the state of the country’s industry and if industrial production is stabilizing in 4Q23.

·         The Sterling is 0.3% lower against the greenback, trading near 1.2679, after crossing 1.27 on Friday.

·         Key data/events to watch this week in the UK: Major industrial train strikes are taking place this week, and on the data front there will not be much apart from PMI data (Tue.).

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·         Month end related buying of the greenback helped steady the dollar index as traders continue to review data releases and mixed signals from Fed officials. After experiencing its worst month in a year, the dollar index steadied, pushing EURUSD towards the bottom of its recent range to trade around 1.09. Key data released yesterday showed that US Core PCE inflation eased in October, which could help to reassure both investors and the Fed that inflationary pressures will abate. After the Fed’s Waller signaled a dovish tone earlier this week, his San Francisco colleague Mary Daly yesterday said that interest rates are in a “very good place” to control inflation. However, she also suggested that she is not thinking about interest rate cuts and that it was too soon to say if hikes are finished. Recent Fed speak comes after the release of the Beige Book on Wednesday, which showed that US economic activity slowed in recent weeks as consumers pulled back on discretionary spending as higher interest rates take hold on household budgets. Markets will be hoping for fresh clues on the outlook for the US as we look forward to a key speech later today from Chairman Jerome Powell.

·         Both the pound and the single currency slipped a touch against the greenback yesterday, with the pound drifting on a lack of UK data and the euro dipping after the release of lower-than-expected inflation data. PMIs from the euro area and the US will be the main focus today, along with Powell’s speech with 1.0960 seen as initial resistance in EURUSD and on the downside support comes in at 1.0875 ahead of 1.0810.

·         The US dollar looks as if it will post its worst month in a year, with the dollar index set to decline 3.5% in November. Q3 GDP data released yesterday showed a rise of 5.2% annualized QoQ, showing inflation as trending lower with the market also reacting to mixed signals from Fed officials. Atlanta Fed President Raphael Bostic said that he is growing increasingly confident that inflation is firmly on a downward path, however his Richmond colleague Thomas Barkin said that the Fed should keep the option of further interest rate hikes on the table. Cleveland’s Loretta Mester, who’s been calling for higher rates this year, said that policy is well positioned for the central bank to be nimble and respond appropriately to the evolving outlook. A further pause from officials is expected at the December 12-13 meeting, where rate setters will also provide further insight into the potential path of monetary policy throughout 2024.

·         EURUSD is currently consolidating in the mid 1.09’s after briefly breaching 1.10 earlier this week, as markets await the release of November’s euro area inflation report. Germany and Spain’s CPI’s both came in weaker than expected and markets forecast euro area headline inflation to fall again in November, despite some upward pressure from energy bills. French inflation data was released earlier this morning, falling below consensus to 3.8% and at the same time GDP data showed that the French economy unexpectedly shrank. A 0.1% expansion was forecast, however a contraction of 0.1% was released suggesting that the euro area’s second largest economy is succumbing to a broader slowdown. The single currency dropped on the data release, with swaps traders now fully pricing in a 0.25% ECB rate cut in April next year.

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·         Both the pound and euro posted further gains against the under-pressure US dollar yesterday, as markets ramp up bets that the Fed will be able to cut rates possibly even before the middle of 2024. EURUSD broke stubborn resistance to trade briefly above 1.10 with cable following in its wake to trade as high as 1.2733 before both pairs consolidated lower. Treasury yields fell and the dollar index dropped for a fifth day after Fed Governor Christopher Waller said that policy is well positioned to return inflation to the central bank’s 2% goal, suggesting that rate setters may not need to hike interest rates any further and that there was a possibility for the Fed to adjust its funds rate lower in the coming months if inflation continues to ease. Discussions around rate cuts have been a taboo subject for Fed officials of late, so markets reacted favorably to his comments suggesting that if inflation trend continues for the next 3-5 months, then the Fed can start cutting rates. Waller is historically one of the Feds most hawkish officials, and his comments come ahead of the release of the Fed’s Beige book later today and a key speech from Chairman Jerome Powell.  

·         There is the potential for additional volatility in the single currency, with month end related flows continuing ahead of key inflation data releases from the euro area in the coming days. The previous resistance level of 1.0960 becomes fresh support in EURUSD, with intraday resistance coming in at 1.1017 ahead of 1.1065 which was the August 10 high.

·         Another day, another drop in the dollar, with greenback losing further ground against its G10 peers as the dollar index fell to its lowest level since August. The post US CPI fall continues, further influenced by month end flows which helped USDJPY fall towards 148. EURUSD is little changed, again consolidating in the mid 1.09’s after attempting to break higher, with the pair running into resistance around 1.0960. GBPUSD continues to trade within its recent range on a 1.26 handle, after attempting to follow EURUSD higher the pair again met resistance around 1.2640.

·         In an interview yesterday, Bank of England Governor, Andrew Bailey suggested that UK interest rate cuts are unlikely for the “foreseeable future” and warned that the next round of the battle against inflation will be “hard work.” Whilst saying that the recent drop in inflation was “very good news” he cautioned that it is unlikely to be repeated. Inflation is still considerably above the central bank’s target and the governor, and his Chief Economist Huw Pill have highlighted the ongoing risk of sticky inflation, confirming that the MPC would be forced to hike again should inflation pressures return.

·         Early rate cuts from the ECB are also looking unlikely, with Bundesbank President Joachim Nagel saying that the central bank is not yet at a point where it should consider reducing borrowing costs. In an interview he said, “It would be premature to lower interest rates soon or to speculate about such steps.” We will learn more about the inflationary environment in the euro area in the coming days with the release of October’s inflation report, but it is looking safe to assume that the central bank has concluded its rate hiking campaign and will deliver a second consecutive pause at next month’s policy meeting.  

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·         The US dollar is little changed as we head towards month end, with the dollar index treading water after falling at the end of last week. EURUSD is consolidating in the mid 1.09-1.10 range and GBPUSD starts the week holding steady above 1.26, with USDJPY falling below 149.

·         Month end activity is likely to influence markets in the coming days with very little on the European data calendar. Inflation data across the euro area is released towards the middle of the week with Spain and Germany releasing the November HICP data Wednesday, ahead of the same for France and Italy on Thursday. The CPI inflation print for the euro area is also released on Thursday, with markets expecting November’s print to fall to 2.6% from the previous 2.9%. A broad-based deceleration in inflation during November is expected, which will likely further boost market confidence of a further hold from the ECB at the final policy meeting of the year on December 14.

·         We will look for fresh clues on the strength of the US outlook this week as markets price a soft landing for the economy. Data due in the coming days includes consumer confidence on Tuesday and third quarter GDP on Wednesday where a small upward revision is expected. Thursday sees the release of the Fed’s preferred price gauge with the release of Personal Income and Spending data. The week is wrapped up with ISM Manufacturing survey which is out on Friday.