Don’t Chase The Dollar Bear Trend

GBP: Fiscal divergence

Sterling has been performing a little better of late, no doubt buoyed by the better global risk environment. We do also think that the fiscal story has helped, where the UK government plans to put ￡20bn to work in the economy, while countries like Germany remain hamstrung by its constitutional court. At the same time, the slightly better November PMI readings have supported Sterling too. These developments have left investors looking for just 40-50bp of Bank of England easing next year – clearly less than what is expected of the Fed or of the ECB.

The UK data calendar is light this week, but we do have several BoE speakers. Governor Andrew Bailey already seems to be playing around with language on forward guidance, where restrictive monetary policy will be retained for an 'extended period' or, most recently, 'for quite some time'.

No major data.

EUR: Orderly inflation outcome

EUR/USD remains well bid, but should struggle to better resistance at $1.0965/1000 this week. The Dollar sell-off may not have legs since the short end of the US rates curve is still pretty firm. From the Eurozone side, this week's data highlight will be flash CPI for November set to be released on Thursday. Here, further disinflation is expected in both headline and core readings, bringing year-on-year rates back to 2.7% and 3.9%, respectively. These readings might tend to support the 70bp of the European Central Bank (ECB) easing priced into Eurozone money markets next year.

Additionally, expect investors to keep one eye on fiscal developments in Germany. It is unclear from where a political solution will emerge and will do little to discourage views of a stagnant Eurozone economy in early 2024. ING Bank favours EUR/USD correcting to the $1.0825/50 area this week.

Data:

15.00: ECB's President Lagarde speech

USD: Too soon

The DXY Dollar index is down around 3.5% from its highs seen in October. The drop looks largely down to the view that the Federal Reserve's tightening cycle is over and that portfolio capital can now be put back to work in bonds, equities, and emerging markets. While acknowledging that November and December are seasonally soft months for the Dollar, ING Banks view is that this Dollar sell-off has come a little early. We are bearish on the Dollar through 2024 but expect the core driver to be a bullish steepening of the US Treasury curve – which has not happened yet. Indeed, US two-year Treasury yields remain firm near 5%. We thus urge caution in chasing this Dollar decline much further.

No major data.?

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