Wayne Cole
SYDNEY (Reuters) – The dollar started Monday in a cautious mood in a week that promises to be critical for the prospect of U.S. interest rate cuts, while the yen’s recent rebound was supported by bets on a domestic interest rate hike.
Over the weekend, Bank of Japan Governor Kazuo Ueda said further interest rate increases were “imminent in the sense that economic data is in line with expectations” – after data showed inflation in Tokyo rose in October.
Markets currently indicate a 56% chance that the BOJ will raise the interest rate by a quarter of a point to 0.5% at its December 18-19 policy meeting.
Barclays (LON:) Economist Christian Keller said this week’s labor market earnings data was expected to show further growth and all signs pointed to another forceful round of wages in February.
“The wage and inflation picture continues to support further interest rate increases, although whether the BOJ will make a decision in December or January remains an open question,” he added.
The risk of an early hike was enough to keep the dollar steady at 149.60 yen, after losing 3.3% last week, its worst performance since July. Support is located around 149.40/47 and 147.35.
The euro held steady at $1.0555, after rebounding 1.5% last week and away from a yearly low of $1.0425. That left the 105,790 level, after closing November up 1.8%, even after last week’s defeat.
“Given the continued resilience of the U.S. economy and the deteriorating outlook elsewhere, we do not believe this is the beginning of a deeper weakening of the dollar,” said Jonas Goltermann, deputy chief market economist at Capital Economics.
“However, the bar for a further change in expected interest rates in favor of the United States in the near term is quite high,” he added. “A period of consolidation ending at the end of the year seems to us the most likely scenario, although risks in 2025 will remain biased in favor of the dollar.”
Crucial to the rate outlook will be the November payrolls report due on Friday, with the median forecast pointing to an boost of 195,000 following the October weather and strikes report, which may also be revised due to the low response rate to that survey.
The unemployment rate will rise to 4.2% from 4.1%, which should keep the Federal Reserve on course for a 25 basis point cut on December 18.
Markets indicate a 65% chance of such an easing of monetary policy, although there are only two further cuts priced in for the entire year 2025.
Multiple Fed officials will speak this week, including Fed Chairman Jerome Powell on Wednesday, while other data includes manufacturing and services sector surveys.
This month also sees interest rate cuts from the European Central Bank, with markets indicating a 27% chance that interest rates could be cut by as much as 50 basis points on December 12.
Political uncertainty is another setback for the single currency as investors wait to see whether the French government can survive the week intact.
Leaders of France’s far-right National Assembly said Sunday that the government had rejected its calls for more budget concessions, raising the risk of a no-confidence vote in the coming days that could topple Prime Minister Michel Barnier.
The threat of a growing budget deficit has brought French yields in line with Greek yields, while the gap with German yields has reached its highest level since 2012.
