US
USD recovered to a seven-day high, outperforming mostly against JPY. USD/INR plunged over 0.50% to lows near 89.6500 on speculation the Reserve Bank of India (RBI) sold dollars in the onshore spot market. RBI has stepped in aggressively since Monday to shore up INR after USD/INR rallied to a record high above 91.00.
We are sticking to our view that relative monetary policy remains a drag for USD. The Fed has room to deliver more rate cuts while most other major central banks are done easing. No policy-relevant US data due today. NY Fed President John Williams gives a TV interview.
US inflation unexpectedly cooled in November, but the data may have been distorted by the government shutdown. For a few price indexes, the Bureau of Labor Statistics used nonsurvey data sources instead of survey data to make the index calculations. Importantly, upside risk to US inflation appears to have softened and supports Fed funds futures pricing 50bps of cuts next year.
Headline CPI fell to 2.7% y/y in November (consensus: 3.1%) vs. 3.0% in September. Core CPI dropped to 2.6% y/y in November (consensus: 3.0%) vs. 3.0% in September, to the lowest since March 2021. Super core services (less housing), a good indicator of underlying inflation trends, eased to a seven-month low at 2.7% y/y vs. 3.2% in September.
The October US TIC data indicates a modest slowdown in foreign demand for US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds). Net foreign purchases of long-term US securities increased $39bn in October vs. $203bn in September driven by private foreign investors net selling of Treasuries and reduced exposure to US equities.
On a twelve-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to a five-month low of $1425bn vs. $1504bn in September and a record high of $1548bn in August.
We expect foreign appetite for US long-term securities to dwindle over time. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. That is a structural drag on USD.
EUROZONE
EUR/USD is trading heavy near 1.1710 after testing an intra-day high of 1.1763 yesterday. French Prime Minister Sebastien Lecornu confirmed the inevitable; Parliament will not be able to pass a budget before the end of the year. As a result, the government will start the process of filing a “Special Law” bill that allows it functionally to roll over the 2025 budget into next year. France’s failure to repair public finances can lead to further bouts of fiscal stress and is a headwind for EUR.
Otherwise, ECB/Fed policy stance continues to underpin the uptrend in EUR/USD. As was widely expected, the ECB left the policy rate unchanged at 2.00% for a fourth consecutive meeting.
The ECB’s updated macroeconomic projections reinforce the case that the bank is in a good place to keep rates on hold for some time and that the next move is a hike. Eurozone economic growth is expected to be stronger than in the September projections and inflation has been revised up for 2026 due to stickier services inflation. Indeed, the ECB’s Q3 negotiated wage tracker released today points to rising wage pressures.
UK
GBP/USD is trading in a tight range around 1.3375 after testing an intra-day high of 1.3446 yesterday. UK retail sales unexpectedly declined in November. Total retail sales volumes dropped -0.1% m/m (consensus: 0.3%) vs. -0.9% in October driven by reduced online demand for precious metals.
Real household consumption growth has been stagnant in recent years. Consumption has risen by just under 1% since 2019 Q4. High interest rates have accounted for a large part of the weakness in consumption growth. As such, less restrictive BOE policy should lead to a pick-up in household spending in coming quarters.
Yesterday, the Bank of England (BOE) delivered on expectations and voted 5-4 in favor of a 25bps rate cut to 3.75%. Andrew Bailey, Sarah Breeden, Swati Dhingra, Dave Ramsden and Alan Taylor supported a cut. Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill supported a hold.
The BOE tweaked its easing bias to imply that additional cuts aren’t guaranteed. The BOE stressed again that the “Bank Rate is likely to continue on a gradual downward path” but added “judgements around further policy easing will become a closer call.” Bottom line: we expect GBP/USD to hold above its 200-day moving average (1.3353).
JAPAN
The Bank of Japan (BOJ) unanimously voted to raise the policy rate 25bps to 0.75% (widely expected) and reinforced its tightening bias. The BOJ noted “given that real interest rates are at significantly low levels…[the Bank] will continue to raise the policy interest rate and adjust the degree of monetary accommodation.”
USD/JPY surged over 1% to a high near 157.40 because the BOJ may have left the door open to a prolong period of accommodative policy. The BOJ did not sharpen its estimate of the neutral rate range as market participants anticipated. The BOJ still sees the neutral rate to be within a wide range between 1% and 2.5%.
We would fade that dovish BOJ narrative. In our view, the bar for additional BOJ rate hikes is low. First, the BOJ warned that “the risk of firms' active wage-setting behavior being interrupted is low”, implying that underlying wage and inflation pressure are likely to persist. Second, BOJ Governor Ueda pointed out the policy rate is still some distance from the lower end of the neutral rate range.
The swaps curve is betting on 75bps of BOJ rate hikes over the two years versus 50bps of easing by the Fed. As such, USD/JPY has scope to converge with two-year implied policy rate differentials and trade closer to 140.00.
