- Dollar to end week on strong footing after Fed’s hawkish cut
- Pound and yen lead the declines, euro steadies after ECB
- Wall Street slips on mixed earnings but likely to rebound
Dollar the main winner in eventful week
Markets were relatively steady on Friday, as one of the busiest weeks of the year comes to an end. In a week where crucial central bank decisions went head-to-head with the hotly anticipated earnings results of the world’s largest tech companies, the US dollar is probably the biggest standout.
The greenback climbed to a three-month high against a backet of currencies on Thursday before easing back slightly. US Treasury yields across the curve have been rallying since Wednesday when the Fed surprised markets with a hawkish cut.
Concerns about inflation are keeping the Fed wary, while, far from panicking, policymakers are only mildly worried about the labour market. Still, with a significant number of layoffs announced in the past week, the Fed is certainly not ruling out a rate cut in December, with investors assigning a two-thirds probability of a 25-bps reduction.
Underscoring the Fed’s cautious optimism on the US economy has been the string of trade deals that President Trump signed with several Asian nations this week. Most importantly, the US and China have agreed to renew their trade truce for one year after resolving their differences on several contentious issues like rare earths.
Hot Tokyo CPI and verbal warning fail to lift yen
Subsequently, Treasury yields have recovered from their recent lows on the brighter outlook, even as the Fed announced that it will stop its balance sheet reduction in December.
The dollar’s gains have been the most pronounced against the yen and pound. The yen has been under pressure ever since Sanae Takaichi – a fiscal and monetary dove – won the LDP party’s leadership race to become Japan’s next prime minister.
However, despite leaving rates on hold on Thursday, the Bank of Japan may not have to wait for too long before its next hike. Core CPI in the Tokyo region rose by a bigger-than-expected 2.8% y/y in October, adding pressure on policymakers to press ahead with policy normalization.
But the data only modestly boosted the yen, with the dollar holding above 154 yen. The usual verbal intervention against “one-sided moves” by Japan’s new finance minister Satsuki Katayama earlier today hasn’t had a major impact either.
Pound on the backfoot, euro finds some support from ECB
The pound has fared even worse, however, with ongoing worries about the UK’s fiscal position and growing expectations that the Bank of England may cut rates at one of its remaining meetings of 2025, pulling it below $1.32.
If the BoE does cut again, it’s more likely to be in December than at next week’s meeting, as policymakers will probably want to have their hands on one more CPI report and to see what the embattled finance minister, Rachel Reeves, will unveil in her August Budget on November 26.
Speculation that Reeves will increase income tax, breaking Labour’s election manifesto pledge, is fuelling rate cut bets as fiscal tightening would make it easier for the BoE to ease again. However, fresh questions have been raised this week about Reeves’ future after another scandal came to light, adding to sterling’s woes.
The euro is steadier, though, on Friday, after the ECB kept borrowing costs on hold yesterday and reiterated that there’s little need at the moment for further rate cuts. Nevertheless, even the euro is headed for weekly losses against the dollar.
Wall Street eyes weekly gains despite earnings wobble
In equities, Asian markets were mixed, although the Nikkei 225 managed to notch up another record close. European shares are in the red today, but US futures are up, reversing some of yesterday’s losses.
The S&P 500 and Nasdaq 100 fell sharply as tech giants such as Microsoft, Meta Platforms and Nvidia saw their shares tumble. Microsoft and Meta both reported stellar earnings, but their stocks came under pressure, with the latter slumping by 11.3%, on concerns about the continued heavy investment in AI and whether all the spending will lead to strong monetization.
However, a rebound is expected today, as upbeat earnings by Apple and Amazon after yesterday's market close is lifting sentiment. Apple’s positive outlook for the holiday season and Amazon’s impressive cloud performance have seen their shares rally in after-hours trading.
Nivida’s stock is also set to bounce back on hopes that its Blackwell chips may yet be sold to China even though Trump signalled he didn’t discuss it with Xi at their meeting on Thursday. In the meantime, Nvidia has been busy making deals with Korean giants Hyundai, Samsung and LG.