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 movers were the PMIs of business activity in the Eurozone and the UK, the former remained weak, while the latter was stronger than expected and moved back into expansionary territory. As a result, sterling traded higher against both the euro and the US dollar, while outperforming most other G10 currencies. Emerging market currencies flopped around without any clear trend or themes, mostly ending the week within 1% or less of where they had started it.

This week, attention should shift back to data, particularly upcoming inflation prints. The Eurozone Flash inflation numbers for November will be released on Thursday, the same day as the US personal consumer expenditures (PCE) inflation report for October. In the absence of major central bank meetings, we’ll get a slate of speakers from the Federal Reserve, the Bank of England, and the ECB. The question for the FX market is whether the sharp sell-off in the 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 PMIs 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. As tends to be the case, last week’s budget announcement yielded little volatility in markets, as the policy tweaks unveiled were either largely as expected or seen as having little to no impact on the outlook for the UK economy. The latest OBR growth forecasts for 2024 and 2025 were, however, revised rather sharply lower from March, suggesting that the period of rather fragile expansion is here to stay. Sterling largely ignored these gloomy projections and rose against most major currencies last week. 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 an economic contraction in the fourth quarter, which would confirm a technical recession after the negative print for the third quarter. The European Central Bank looks for some relief from the gloom in this 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 rally against the dollar so far this month will be difficult to maintain unless the Eurozone economy starts showing signs of life. Indeed, concerns surrounding the state of the bloc’s economy appear to be the main culprit behind that underperformance in the euro last week, which ended more-or-less unchanged against the broadly weaker US dollar, and depreciated against all its G10 peers, save the Japanese yen.

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 in labour market conditions, while the November services PMI beat expectations. Durable goods order data was slightly less encouraging with the less volatile measure, which excludes transportation, failing to expand for the first time since April. Consumer inflation expectations rose again last week. However, this week’s PCE inflation data will be a more significant test of whether the disinflation trend remains in place in spite of labour market strength and consumer worries about inflation. Any surprise to the upside here could push expectations for Fed rate cuts further into the future, with the first cut now not fully priced in until June 2024.