Overview:
The British pound continued its descent, reaching $1.28, a three-month low, as the U.S. dollar gained ground. The dollar’s rally is driven by expectations that Trump’s economic policies could spur inflation, putting limits on the Federal Reserve’s capacity to reduce borrowing costs.
UK Labor Market and BoE’s Cautious Stance
In the UK, labor market data provided support for the Bank of England’s restrained approach to rate cuts. Regular pay growth, excluding bonuses, remained firm at 4.8% for the three months to September, in line with BoE forecasts, while total pay (including bonuses) accelerated further. However, challenges surfaced in the form of a rising unemployment rate at 4.3% and the lowest job vacancies since May 2021.
Following its recent 25 basis-point rate cut, the BoE has adopted a wait-and-see approach to further reductions. More insight is expected from upcoming Q3 GDP growth data this week.
Dollar Rallies on Trump’s Policy Expectations
The U.S. dollar surged toward a four-month high against major currencies, with the dollar index (DXY) rising to 105.59, close to Monday’s peak of 105.70. Investors are positioning for U.S. economic outperformance as Trump prepares to take office with control over Congress, allowing him to push an agenda of tax cuts and spending reforms. The Fed’s likelihood of a December rate cut has decreased, with market odds for a quarter-point cut dropping to 69% from nearly 80% last week.
Impact of Trump’s Trade and Tariff Policies
Potential tariffs and restrictive immigration policies under Trump are anticipated to drive inflationary pressures, pushing the dollar higher. Trump has signaled aggressive trade measures, particularly against China, proposing blanket 60% tariffs, and targeting the eurozone with warnings of “a big price” over trade imbalances, specifically around car exports.
Global Market Reactions:
- Pound (GBP/USD): Weakness in sterling continued, with the currency at $1.2841, pressured by dollar strength and ahead of UK employment data that could influence BoE rate-cut decisions.
- Euro (EUR/USD): The euro slid to $1.0629, reflecting both dollar strength and regional political uncertainty, especially in Germany, where Chancellor Olaf Scholz’s coalition faces potential disruption.
- Australian Dollar (AUD/USD): The Aussie dipped to $0.65525 as markets remain cautious due to China’s uncertain economic outlook, a significant factor for Australia’s economy.
- Japanese Yen (USD/JPY): The yen traded at 153.48 per dollar, following a 0.7% drop, reflecting the yen’s vulnerability to a stronger dollar and rising U.S. Treasury yields.
- Bitcoin (BTC/USD): Bitcoin surged to a new all-time high of $89,637, as investors position themselves amid Trump’s stated ambition to make the U.S. a global leader in cryptocurrency, with speculation pushing the year-end target close to $100,000.
Looking Ahead: Key Events to Watch
- Upcoming U.S. Nonfarm Payrolls and other economic indicators this week could further impact Fed policy expectations.
- UK GDP Data: A key determinant of BoE’s rate outlook as it assesses the health of the UK economy.
- Eurozone Inflation Readings: With ongoing political shifts, inflation data, particularly from Germany, will be critical in guiding ECB’s rate decisions.
Conclusion
With the dollar strengthening on the back of solid U.S. economic data and expectations of a Trump-led policy shift, global FX markets are adjusting. For traders, the current environment favors caution, especially with sterling, the euro, and yen all under pressure. The Fed’s decisions in December and potential global responses to U.S. trade policies remain the pivotal factors to watch as Trump’s agenda begins to shape the FX landscape.
