02 December 2024

GBP

Having posted a six month low against the USD on 22 November, GBP managed to find some much needed footing as market rates picked up by close to two cents at the time of writing. With inflation rising to 2.3%, the BoE is expected to pause any changes to monetary policy in its 19 December meeting.

This week’s release of UK manufacturing and services PMI will likely shift the focus to the UK’s economic performance. Business sentiment about the outlook for 2025 has soured. The Institute of Directors (IoD) has just released a survey showing that business confidence has declined to its lowest level since April 2020, when the first UK Covid lockdown was announced. Over 600 business leaders surveyed by the IoD believe that Rachel Reeves’ budget will be a block to business investment in the new year.

Manufacturing PMI, which was released on Monday morning, showed a contraction to a nine month low. Output for September is 0.7% lower than it was a year before. The drop suggests there will be further challenges in the sector, caused by an uplift in costs and continued uncertainty in demand.

Tuesday sees the release of retail sales for November, which might offer potential relief with an anticipated strong improvement on the previous 0.3% release to 0.7%, as consumers begin their festive spending. Services PMI will arrive on Wednesday.

EUR

Friday saw eurozone inflation rise to 2.3% for November, up from 2.0% in October, and above the European Central Bank's target for the first time in three months. The rise was widely anticipated with price increases in the service sector outweighing the reduction in energy costs across the bloc.

Eurozone monthly core inflation dropped by 0.4%, which suggests underlying price pressures could be easing. Services prices rose 3.9% year-on-year, but fell by 0.9% compared to October, offering a glimmer of hope for the inflation outlook.

While the annual increase marks a slight departure from the ECB’s target, the monthly data shows a more optimistic trend. Consumer prices in the eurozone fell by 0.3% in November compared to October, which is the steepest monthly decline since January 2024.

While there remains a chance of a 50 basis point cut at the European Central banks meeting on 12 December, it looks unlikely. A rate cut in some form is widely anticipated, but concerns about Trump’s trade tariffs on imports to the US have the potential to curb EU growth and will likely force a smaller rise.

USD

The dollar continues to set the tone in FX markets at the beginning of December.

Although the USD has seen strong gains following the re-election of Donald Trump, it lost some ground last week as risk appetite increased at the news of a ceasefire agreement between Israel and Lebanon. This was also reflected in the move in gold prices, which saw a similar sell-off on the back of the news.

The US employment market continues to look healthy, but has started to show signs of cooling. With November’s non-farm payrolls reading at +12,000, investors will be hoping this was a blip in the labor market caused by inclement weather conditions and the build-up to the US presidential election. By contrast, this Friday’s non-farm payrolls is anticipated to show that more than 180,000 new jobs were created in November, signalling a bounce back from the challenges of October.

Wednesday’s ADP Employment Change will offer further insight. The health of the labor market is of particular importance because of its potential impact on the FED’s next monetary policy decision on 18 December. Current expectations are for a 70% chance of a 25 basis point cut at the meeting.

This week also sees manufacturing and service PMI releases for the US giving a further look into the current strength of the world’s largest economy.

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