The euro has dropped 0.4% to a fresh two-year low and sterling has fallen by 0.5% to its weakest level since May 2024. EUR/USD is now trading more than 1.3% lower compared to its morning peak on Monday, despite little on the data side to justify it.
With the turn of the year, markets are focusing their attention on Trump’s inauguration later in the month, where any day one executive order or policy announcements are going to set the tone for his presidency.
A combination of a) higher growth and inflation expectations under Trump’s policies, and b) the continued strength in the economic data over the past quarter, are behind expectations for less than two full rate cuts this year.
Add to that the softer picture in Europe, and we have a very strong dollar heading into 2025.
That said, moves like we are seeing today rarely persist and FX is detaching from rate spreads – that is likely because liquidity remains low and because we are trading in a data vacuum. There is a good chance that these moves over the holiday period are unwound in the near term, and the labour market data is going to start to dominate next week.
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