Euro Slides to $1.05 Amid Rising Risks and Market Uncertainty
The euro has sharply declined to $1.05 against the US dollar at inter-bank (IB), losing nearly 1% due to escalating geopolitical tensions, trade risks, and widening interest rate differentials that weigh against the euro. This drop comes despite a significant surge in Eurozone wages, which complicates the European Central Bank's (ECB) plans to ease monetary policy as inflation slows.
Eurozone third-quarter negotiated pay increased by 5.4% year-on-year, up from 3.5% in the prior quarter, with Germany driving much of the growth. While wage growth signals persistent inflationary pressures—a key focus for the ECB—a weakened economic outlook and reduced corporate pricing power are likely to keep the easing cycle on track. Investors are pricing in a 139-basis-point rate cut by the ECB by the end of 2025, but ECB officials have downplayed the likelihood of aggressive monetary easing, pointing to increased volatility in euro interest rates heading into 2024.
In the foreign exchange (FX) options market, traders are increasingly positioning for a weaker euro as the currency hovers near its 2024 low. A sustained breach below the $1.05 mark at IB could pave the way for a decline to $1.03 at IB, a key downside target, particularly under the scenario of a "Red Sweep" in US elections. Geopolitical factors, such as a potential escalation in the Russia-Ukraine conflict, could add further downward pressure to the euro, exacerbating its vulnerabilities in the global economic landscape.
Sterling Slumps Against the Dollar but Holds Gains Versus the Euro
The British pound has erased all its post-inflation gains against the US dollar, sliding into negative territory for the year and dropping over 2% month-to-date. Currently trading about two cents below its five-year average, GBP/USD has fallen significantly from being six cents above this level less than two months ago—a shift attributed to the "Trump effect." In contrast, GBP/EUR has reclaimed the €1.20 mark at IB, rising over 4% year-to-date and sitting five cents above its five-year average.
The bullish outlook for sterling, driven by cyclical factors since early 2024, may persist into 2025 if UK economic data remains strong and inflation continues to outpace expectations. This scenario could prompt the Bank of England (BoE) to delay rate cuts. However, uncertainty looms as the October UK Budget introduces a new fiscal-monetary policy mix. While initially supportive for the pound, concerns are growing over the potential for tax hikes to dampen consumption and economic growth. If UK economic performance falters, sterling could face renewed pressure. Flash industry PMIs, due tomorrow, will provide further insight into the economy's health as 2024 draws to a close.
For the BoE, no rate changes are expected in December, with the central bank likely to maintain its gradual pace of rate cuts, interpreted as one reduction per quarter. With markets currently pricing in only 60 basis points of cuts by the end of 2025, there is room for traders to adjust their expectations, potentially leading to further downward corrections for sterling.
Dollar Strengthens Amid US Exceptionalism Narrative but Faces December Headwinds
Russia’s revision of its nuclear doctrine initially triggered a surge in safe-haven demand, but investor focus quickly shifted back to the US economy. Recent better-than-expected economic data, combined with a Republican sweep of the presidential and congressional elections, have bolstered the narrative of US exceptionalism. This economic resilience and upward revisions to GDP forecasts contributed to significant dollar gains in 2024, a trend that may continue into early 2025.
Despite the dollar’s momentum, uncertainties remain. Key questions include the timing and impact of fiscal and tariff policy changes, how global peers might respond, and whether upcoming US data will continue to confirm economic outperformance. Additionally, December’s historically weak seasonality for the dollar could present a window for other currencies to recover some lost ground.
