Euro’s selloff accelerated today, breaking to a new 2024 low against Sterling. The common currency also weakened notably against the Swiss Franc, even as it remained relatively steady against other peers. Market sentiment appears to be pricing in dovish guidance from ECB at its upcoming meeting, where a standard 25bps rate cut is expected over a more aggressive 50bps reduction.
Economic struggles in Germany and France, the bloc’s largest economies, remain at the heart of the Eurozone’s troubles. Growth momentum has faltered since mid-year, with the temporary boost from the Paris Olympics fading quickly. Political uncertainty is adding to the strain, with Germany facing policy gridlock and France grappling with ongoing governance challenges. Sentix Investor Confidence data released yesterday highlighted the extent of this economic malaise, further dampening market sentiment. Externally, the prospect of renewed US tariffs under President-elect Donald Trump looms large, posing additional threats to the Eurozone’s export-reliant economies.
ECB is under pressure to support the faltering economy while balancing inflation risks. Markets are now pricing in a cumulative 152bps reduction in the deposit rate by the end of 2025, bringing it down from 3.25% to approximately 1.75%.
This anticipated pace of easing of ECB contrasts sharply with BoE’s more measured approach. Despite wide dissatisfaction with the Autumn Budget, the UK government under Prime Minister Keir Starmer appears politically stable for now. BoE has signaled a cautious path forward, likely implementing only four rate cuts next year, leaving Sterling better positioned relative to the Euro.
Across the Atlantic, Fed is expected to deliver another 25bps rate cut in December. However, a pause in January seems increasingly likely as the Fed assesses the economic implications of incoming policies from the Trump administration. Expected inflationary pressures from fiscal stimulus and trade measures are likely to temper Fed’s pace of easing, supporting a relatively firmer Dollar.
Overall in the currency markets, Aussie and Kiwi remain the weakest performers of the day, driven by RBA’s dovish shift and fading optimism over China’s latest economic stimulus pledges. In contrast, Loonie leads the pack, followed by Sterling and Dollar while Yen and Swiss Franc are positioning in the middle.
Technically, EUR/USD would be a focus in the next two days, with US CPI and ECB rate decision on agenda. Price actions from 1.0330 are so far corrective looking which suggests that fall from 1.1213 is still in progress. Break of 1.0471 minor support will argue that the corrective recovery has completed, and target 1.0330 and below.
In Europe, at the time of writing, FTSE is down -0.64%. DAX is up 0.08%. CAC is down -0.70%. UK 10-year yield is up 0.035 at 4.315. Germany 10-year yield is down -0.001 at 2.216. Earlier in Asia, Nikkei rose 0.53%. Hong Kong HSI fell -0.50%. China Shanghai SSE rose 0.59%. Singapore Strait Times rose 0.49%. Japan 10-year JGB yield rose 0.024 to 1.066.
RBA holds rates steady, dovish shift raises odds of Feb cut
RBA held its cash rate steady at 4.35% as widely expected, but the accompanying statement marked a clear pivot towards a more dovish stance. While May remains the more likely timing for the first rate cut, February is now emerging as a real possibility, depending on upcoming Q4 jobs and inflation data from Australia.
The most striking change in the RBA’s statement was its removal of the phrase “not ruling anything in or out” regarding future monetary policy decisions. This change aligns with the board’s growing “confidence that inflationary pressures are declining.” RBA acknowledged that some upside risks to inflation have eased and noted the gap between aggregate demand and supply capacity is continuing to narrow.
Recent activity data, according to the RBA, has been “on balance softer than expected,” with the central bank pointing out risks of a slower-than-anticipated recovery in consumer spending. These factors collectively suggest a step away from inflation vigilance and a move closer to easing policy.
Governor Michele Bullock later emphasized that the wording adjustments in the statement were deliberate. While she clarified that a rate cut was not discussed during today’s meeting, she acknowledged uncertainty over whether one could occur as early as February.
Markets responded swiftly, with swaps traders raising the probability of a February rate cut to over 60%, up from 50% the previous day. Market expectations now fully price in two rate reductions by May.
Australia’s NAB confidence turns negative to -3 as business conditions deteriorate
Australia’s NAB Business Confidence index slid sharply to -3 in November, down from 5 in October, returning to below average levels. Business conditions also weakened notably, dropping from 7 to 2, marking declines across trading, profitability, and employment metrics. Trading conditions fell to 5 from 13, profitability shifted into negative territory at -1 from 5, and employment conditions edged down to 2 from 3.
Cost pressures showed little relief, with input costs largely unchanged. Labor cost growth held steady at 1.4% in quarterly terms, while purchase cost growth edged slightly higher by 0.2 percentage points to 1.1%. On the pricing side, output price growth remained unchanged at 0.6% in quarterly terms, with retail price growth retreating to 0.6% and recreation and personal services easing slightly to 0.7%.
China’s trade data highlights persistent import weakness amid export slowdown
China’s trade data for November showed weak signals as exports grew 6.7% yoy to USD 312.3B, down sharply from October’s 12.7% yoy expansion and missing expectations of 8.5% growth.
Export performance varied across key regions, with shipments to the US rising 8% yoy, to the EU up 7.2% yoy, and to ASEAN growing by 14.9% yoy. However, exports to Russia declined by -2.5% yoy.
On the import side, the picture was decidedly more negative. Imports fell by -3.9% yoy, marking the steepest decline since September 2023, and missing expectations of a slight 0.3% yoy increase.
Weakness was broad-based, with imports from ASEAN dropping -3% yoy, the US contracting by -11% yoy, and the EU and Russia both registering declines of -6.5% yoy. These numbers underscore persistent weak domestic demand, consistent with recent data showing subdued consumer inflation.
Trade balance widened from USD 95.7B to 97.4B, above expectation of USD 92.0B.
EUR/GBP Mid-Day Outlook
Daily Pivots: (S1) 0.8267; (P) 0.8279; (R1) 0.8290; More…
EUR/GBP’s down trend resumed by breaking through 0.8259 low. Intraday bias is back on the downside for 0.8201 key support level next. Strong support could be seen there to bring rebound. On the downside, above 0.8282 minor resistance will turn intraday bias neutral first. Further break of 0.8363 resistance will be the first signal of bullish trend reversal. However, sustained break of 0.8201 will carry larger bearish implications.
In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 (2022 low), but strong support should be seen there to bring rebound. However, outlook will remain bearish as long as 0.8624 resistance holds even in case of strong rebound. Decisive break of 0.8201 will indicate long term bearish reversal.
