Global Currency Dynamics

The Thanksgiving?holiday in the US usually makes for quiet markets and a lack of volatility, and last week was no exception. The main market mover was the PMI?indices of business activity in the Eurozone and the UK, the former weak, the latter stronger than expected. As a result, the Sterling traded modestly higher against both the Euro and the US dollar. Emerging market?currencies, like risk assets, flopped around without any clear trend or themes, mostly ending the week within 1%$ or less of where they had started.

This week attention should shift back to data, in particular the inflation report. The most?timely major indicator?in the world, the Eurozone?Flash inflation numbers?for November, will be released on Thursday. same day as the US personal consumer?expenditures inflation?report for October. In the absence of major central bank meetings we will get a slate of speakers from the Federal Reserve, the Bank of England and the ECB. The question for FX markets is whether the sharp sell-off in the US dollar can continue in the absence of clearer signs of economic strength outside of the US. We think it may have fallen too much, too quickly.

????GBP

The PMI indices of business activity posted a significant positive surprise in the UK last week. The overall index rebounded above the 50 level that indicates business expansion, a marked contrast with the gloomier numbers published across the Channel. Modest expansion, sticky inflation and the fiscal stimulus announced by the government's recent announcements probably means that the Bank of England will be reluctant to lower rates any time soon. Sterling rose against most major currencies, and we think that it has room to continue to do so against the Euro.

????EUR

The flash PMI numbers in the Eurozone continue to point to a fourth-quarter economic contraction in the fourth quarter, which would confirm a technical recession after the negative print for the third quarter. The ECB looks for some relief from the gloom in next week's November flash inflation report, which is expected to show yet another significant fall in both the headline and core indices, to just below 4% in the latter case. Regardless of the outcome, the Euro's rise against the dollar in November will be difficult to maintain unless the Eurozone economy starts showing signs of life.

????USD

The dollar mostly traded off news elsewhere in the data-scarce Thanksgiving holiday week. At the margin, second-tier data published last week may have served to push expectations for rate cuts into the future. Weekly jobless claims fell sharply, belying the narrative of a cooling labor market. Consumer inflation expectations rose again. However, this week's PCE inflation data will be a more significant test of whether the disinflation trend remains in place?in spite of labor market strength and consumer worries about inflation.?