EURUSD remains unmoved, despite the collapse of the French government

Published 2024-12-05, 06:05 a/m

CAD

Little news of note for the loonie saw USDCAD tracking sideways yesterday. A similar story looks likely today too, with markets seemingly adrift ahead of North American jobs data tomorrow. Granted, we think the dollar should be stronger given our view on Chair Powell’s comments overnight. But at this juncture, it looks like markets will need data to trigger a further leg higher for the pair.

USD

The DXY index ended Wednesday down a touch, helped by a soft set of ISM services prints. Even so, we are inclined to think that markets have overlooked some notable comments from Fed Chair Powell that certainly caught our eye last night. Specifically, Powell suggested that the FOMC could be “a little more cautious as we try to find neutral”. While not explicit pushback on a 25bp cut this month, it is far from an endorsement of the roughly 75% chance that markets are pricing. Indeed, when set against statements prior to the November meeting, which also looked like a tossup, this was arguably more hawkish. As we see it, this is another indication that the FOMC will let the data do the talking between now and December 18th. Moreover, given our view that the US economy remains fundamentally healthy and that inflation looks a little sticky, the balance of risks marginally favours a hold in rates. The first test of this thesis comes tomorrow, with the publication of the November jobs report. If we are right, and the numbers exceed expectations, then a dollar rally into the weekend should be on the cards.

EUR

Lagarde said little of note in her comments yesterday, leaving all eyes on French politics overnight. As expected, the parliament passed a censure motion, triggering the collapse of the government, but despite this EURUSD has so far been little moved. To us, this is more than a little surprising. Granted, markets had largely expected the result of the vote. In our view though, 10Y OAT-bund spreads at 85bps and EURUSD trading north of 1.05 fails to fully reflect the full seriousness of risks that now face the French economy, and by extension the eurozone. We think the euro should be weaker, and with a light docket of data releases scheduled for today, we would not be surprised to see the single currency soften as European traders begin to wake up this morning.

GBP

A light data calendar once again proved positive for the pound on Wednesday, despite an FT interview with BoE Governor Bailey early in the morning. Markets initially reacted to a badly written headline, sparking a selloff for sterling. But the bigger takeaway stems from Bailey’s signal in favour of 100bps of rate cuts in 2025. With this largely endorsing current market pricing, the pound was left to drift higher, a move that has continued this morning. Today, the BoE’s Decision Maker Panel is the main domestic release of note. With markets expecting to see a modest uptick in short-run inflation expectations, we see little to upset sterling’s uptrend ahead of US payrolls tomorrow afternoon.

This content was originally published by our partners at Monex Canada.

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