EUR Rebounds After Comments from Isabel Schnabel, will this Rebound Fade Away?

November has been a dynamic month in the FX markets, with notable fluctuations in major currencies influenced by central bank actions, geopolitical developments, and economic data releases. Here's a roundup of the key trends and their implications.

Euro on the Rebound

The euro (EUR) experienced a rally in late November, driven by evolving market expectations regarding the European Central Bank (ECB). Isabel Schnabel, a prominent ECB policymaker, dismissed the likelihood of aggressive rate cuts, suggesting a more gradual easing approach. This announcement provided a tailwind for the EUR/USD pair, narrowing the rate spread between the euro and the dollar.

EURUSD H1 Chart 

Additionally, inflation data from Germany and Spain, coupled with the Eurozone's upcoming inflation forecast, added momentum. 

Euro Zone Upcoming CPI 

These indicators will play a pivotal role in shaping market sentiment ahead of further ECB decisions. I will be monitoring economic confidence metrics and political developments, particularly in France, which could sway eurozone stability. I’ve done a full analysis on EURUSD and how low could it continue to go, you can find it HERE.

ECB rate Cut Expectations

Dollar’s Temporary Retreat

The US dollar index (DXY) saw its most significant one-day correction since August, influenced by month-end portfolio rebalancing and softer macroeconomic data. While high US interest rates and geopolitical uncertainty remain supportive for the dollar, the potential for Federal Reserve rate cuts in December has tempered bullish sentiment. 

FedWatch Tool

With 17 basis points of a 25bp cut already priced in, expectations around upcoming economic releases could redefine the dollar's trajectory. I’ve done a concise blog on this topic where you can find HERE & HERE.

DXY Chart H4

Japanese Yen: Caught Between Central Banks

The yen (JPY) continues to draw attention due to contrasting monetary policies between the Bank of Japan (BoJ) and the Federal Reserve. While the BoJ maintains a trajectory of rate hikes, the Fed's dovish tilt has eroded the carry trade appeal of the USD/JPY pair. Friday's Tokyo Consumer Price Index (CPI) release will offer valuable insights into inflation trends, potentially influencing BoJ’s decisions in December. You can find more about the JPY on thig blog: CLICK HERE.

USDJPY H1 Chart 

Emerging Market Volatility

Emerging market currencies remain under pressure amid global uncertainties. The Mexican peso gained briefly after a diplomatic exchange between President-elect Donald Trump and Mexico's President Claudia Sheinbaum. However, heightened market volatility suggests that the carry trade in this region is far from stable.

In contrast, the Brazilian real hit multi-year lows, reflecting fiscal policy concerns and looming global trade tensions. With proposed spending cuts in Brazil, investors will be watching closely for signs of stabilization or further depreciation.

USDBRL H4

Trading Strategies and Outlook

1. EUR/USD: Given the narrowing rate spread and steady European policy outlook, the pair could remain supported, though political risks in France warrant caution.
2. USD/JPY: The technical support at 150.00 remains a key level, with market volatility expected to persist.
3. Emerging Markets: Investors should brace for heightened volatility, particularly in currencies like the Brazilian real and the Mexican peso.

As we approach the year's end, FX markets are primed for continued shifts influenced by monetary policies, geopolitical events, and economic performance. Staying informed and adaptable will be crucial for navigating this complex landscape.

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