USD: Some potential dollar downside this week
In a week thinned by Thursday's US Thanksgiving Day holiday, there will be much attention on Ukraine peace talks. We have been here several times before, but it seems like the pressure of sanctions has Russia slightly more interested in a peace deal than usual. Latest reports suggest the US is backing away from supporting Russia's maximalist demands, and Ukrainian President Volodymyr Zelenskyy may be on his way to Washington later this week to talk directly with US President Donald Trump. Details are scarce from the current peace talks in Geneva, but the mood music is cautiously optimistic.
CEE FX had been rallying on this US-Russia peace plan late last week, and today we are also seeing EUR/CHF edge above 0.93. Recall that EUR/CHF collapsed on the Russian invasion in 2022. We're also seeing natural gas and oil prices close to the lows of the year – the reverse of the 2022 supply shock. This should all be welcome news for global growth prospects, should peace talks progress further, and a mild dollar negative if it generates a re-rating of European growth prospects and softens the advantage of US energy independence.
Away from politics, the dollar focus this week will be on emerging US data and the release of the Federal Reserve's Beige Book on Wednesday evening. When it comes to data, the September retail sales data released tomorrow should be quite strong, but the market will probably have more interest in the Beige Book. Here, any anecdotal evidence from the Fed's 12 reporting districts that the slowdown in employment is broadening could put the notion of a Fed December rate cut back on the agenda. On Friday, remarks made by New York Fed President John Williams suggesting that he favours another cut in December moved markets. In fact, market pricing of a December cut seems to have spiked back to 75%, and questions why the dollar is not a little weaker this morning.
We think the combination of promising Ukraine peace talks and the Beige Book poses downside risks to the dollar this week. This means that DXY resistance at 100.25/35 may hold after all.
EUR: Lower energy prices are welcome
Headlines this morning show European natural gas dropping below EUR30/mwh for the first time since May 2024. This will be very welcome news for the European manufacturing industry. This comes at a time when the manufacturing sector continues to weigh on the broader composite business PMIs in the region, and as Germany considers energy subsidies. The fall in energy prices has led to the euro's terms of trade index rising to its highest level of the year – a clearly positive development for the euro. We are a little surprised to see EUR/USD still languishing not far from 1.1500 – but perhaps investors are more comfortable expressing euro-positive views through EUR/CHF than EUR/USD. Still, we think events this week could firm up the floor in EUR/USD at 1.1500.
On today's calendar is the German Ifo index. November PMI data for Germany released on Friday was mildly disappointing, so let's see what happens to the key expectations component of the Ifo, which is expected at 91.6 today.
If there are any further positive developments on the Ukraine peace plan, EUR/CHF could easily correct up to 0.9400/9450 in thinning year-end markets.
