25 November 2024

GBP

The pound has weakened against the dollar and other currencies following the release of the UK Gross Domestic Product (GDP) for Q3 on 15 November. GDP for the period July to September showed growth of only 0.1%, significantly lower than the 0.4% figure in Quarter 2 (April to June) and 0.6% in Quarter 1 (Jan to March).

The following Friday (22 November) saw the release of the overall Purchasing Managers Index (PMI), which fell into contraction in November, dropping from 51.8 to 49.9. The Manufacturing sector saw the most significant drop, sinking to 48.6. The disappointing PMI figures could continue to have a negative effect on sterling during the course of this week.

Some potentially positive news for the Pound came from a Reuters poll, which indicated that almost two-thirds of economists (46 out of 72) expect rates to be kept on hold at the Bank of England meeting in December.

While rate cuts are necessary for consumers to deal with rising living costs, these events have the potential to weaken the currency, so a pause on further cuts will likely have the reverse effect. The Bank of England also perceives the Autumn budget as "inflationary", which could also contribute to policymakers keeping interest rates higher for longer.

EUR

Europe's economic data is also creating downward pressure on its currency. The bloc's combined PMI showed a fall in November from 50 to 48.1, with the Manufacturing sector dropping as low as 45.2 when it was released on Friday.

According to ING's Chief Economist of The Netherlands, "The November PMI is another wake-up call for eurozone policymakers that the economy continues to show signs of weakness. New business is weakening again for both manufacturing and services with export orders, in particular, being down sharply as the eurozone economy battles weak demand from abroad."

Markets have also priced in another interest rate cut by the European Central Bank on 12 December. Current estimations from Bloomberg suggest that the chances of this being either a 25 or 50-basis-point cut are on a knife edge. The diverging interest rate trajectories in the UK and Europe could be why the currency pair has remained depressed for the past couple of months and potentially underpins the two-and-a-half-year low the euro saw a fortnight ago.

This week, the German CPI inflation update is due on Thursday and is expected to remain at 2%. The following day, we will see the release of German retail sales figures. The measure shines a light on Germany's third largest sector, accounting for 17% of the country's GDP. Any deviation from market expectations could impact the euro, as Germany is one of Europe's largest economies.

USD

The US dollar continues to strengthen against its currency counterparts and is well on the way to establishing itself as one of the best-performing G10 currencies in Q4. USD has risen to a six-month high against the sterling and a staggering two-year high against the euro in November. The prospect of a Trump administration is driving this new confidence in USD, and in spite of a 5% market rise in the last four weeks, the dollar's attractiveness does not look likely to wane any time soon.

With Thanksgiving on Thursday, this will be a shortened week for the US, and the market focus will likely be on Wednesday's release of the Personal Consumption Expenditures (PCE) Price Index Excluding Food and Energy, also known as the core PCE price index.

The core index makes it easier to see the underlying inflation trend by excluding two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices. The core PCE price index is closely watched by the Federal Reserve and can significantly impact monetary policy.

The US Core PCE is expected to remain unchanged at 2.2%, with GDP also expected to hold a firm at 2.8% for Q3 when released earlier on Wednesday.

According to CME's FedWatch Tool, investors have recently scaled back expectations for the path of interest rate cuts from the Federal Reserve as the economic impact of legislative policies by the Trump administration is assessed. Investors are currently pricing in a 52.7% chance of a 25 basis point cut at the Fed's December meeting, down from 69.5% a month ago

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.