The decline in inflation in the United States and the weakening labor market have boosted expectations for interest rate cuts by the Federal Reserve, which has supported risk appetite in the markets as the year comes to a close. Annual inflation fell to 2.7% in November, well below expectations, while core inflation slowed to 2.6%, its lowest level since 2021. Employment data showed a limited addition of jobs, with negative revisions for previous months, reflecting the loss of momentum in the labor market and supporting bets on further monetary easing, which has kept pressure on the dollar.
On the other hand, global central banks have taken divergent paths. The Bank of England cut interest rates as expected, but sharp divisions within the monetary policy committee limited the impact of the decision and provided temporary support to the pound, although UK data suggests slowing growth and a decline in inflationary pressures, indicating further rate cuts in the near future. The European Central Bank kept interest rates unchanged, reaffirming its data-driven approach, with a slight improvement in growth forecasts and inflation nearing its target level. The Bank of Japan raised interest rates to their highest level since the mid 1990s, but indicated that any further hikes would be gradual, which limited support for the yen.
In commodity markets, oil prices fell to their lowest levels in years, which negatively impacted the currencies of commodity-exporting countries, such as the Australian, Canadian, and Norwegian dollars. This decline came at a time when global Purchasing Managers’ Index (PMI) indicators showed a loss of momentum, especially in the U.S., although it remained in the growth zone. This reinforced expectations of U.S. interest rate cuts and weakened the dollar in the medium term.
The U.S. dollar showed some resilience in the short term despite the negative data, but it is still on track to post one of its worst annual performances in decades, with markets pricing in further interest rate cuts in the coming year. The euro benefited from a relative improvement in European data and yield differentials but remains vulnerable to corrections if sentiment weakens. The British pound has recently posted notable gains, but the weak fundamentals of the UK economy make these gains fragile. The Swiss franc remained relatively stable despite improved growth forecasts, while the Chinese yuan continued to strengthen, supported by the dollar’s weakness, despite a slowdown in some local economic indicators.
Overall, market movements reflect a sense of caution and uncertainty, with increasing bets on monetary easing in the U.S. versus limited caution or tightening in other economies, with currency performance remaining tied to the developments in economic data and commodity prices in the coming period.
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