Fed Signals and Dollar Surge Shape Investor Sentiment  

Last week, investors were relieved when the Consumer Price Index (CPI) met expectations, alleviating fears that rising inflation would halt the Federal Reserve's plans to cut interest rates in December. However, on Friday, Fed Chair Jerome Powell struck a cautious tone regarding the pace of rate cuts, dampening the market's recent risk rally and tempering the optimism that had propelled U.S. equities to record highs.  

Meanwhile, the U.S. Dollar Index has surged approximately 7% over the past seven weeks, marking its strongest performance over such a period since 2022. Options trading activity and positioning data indicate traders are anticipating further gains in the dollar. Additional upside risk for the greenback may stem from key policy proposals by former President Donald Trump—particularly tariffs—that may not yet be fully reflected in current market prices.

Pound vs. Euro: UK Data Risks and Eurozone Headwinds  

The Pound Sterling may face further losses against the Euro in the coming week if UK inflation and PMI figures fall short of expectations. Last week, the Pound to Euro exchange rate (GBP/EUR) dropped 0.65%, despite hitting a two-year high of 1.21 at inter-bank (IB) on Monday, last week. This peak reflects a generally constructive outlook for the Pound against the Euro, supported by the UK's higher interest rates compared to the Eurozone.  

Broader euro weakness stems from political uncertainty in Germany and concerns about potential U.S. tariffs under a future Trump administration. In the near term, GBP/EUR appears to be consolidating its recent gains, with resistance at the 1.21 highs for 2024. On the downside, strong support is seen at 1.1850, aligning with the lows recorded in November, October, and September.

Key UK Inflation Data and Geopolitical Tensions to Shape Markets  

This week’s UK inflation data, set for release on Wednesday, will be a critical focus for markets. Inflation is expected to rise to 2.2% year-on-year in October, up from 1.7% in September, signalling an acceleration in price pressures.  

Adding to market dynamics is President Biden’s recent decision to authorise Ukraine to deploy U.S.-made long-range missiles for strikes deep into Russian territory. Geopolitical tensions like these often push investors toward safe-haven assets such as the U.S. dollar, potentially boosting its value further.