Thin liquidity and month-end could keep the dollar under pressure

Markets prepare for an eventful December

Pending a major development, the week is likely to finish on a quiet note as the US markets will open today but close early. With Fed speakers taking a back seat this week, geopolitics dominated the headlines. The situation in the Ukraine-Russia conflict remains tense, with both sides allegedly preparing for another round of long-range missile attacks.

On the flip side, the ceasefire between Israel and Hezbollah was a very positive step, but maintaining this agreement appears to be an even more challenging task. Amidst these developments, gold is closing the week in the red, completing a very negative month. November is actually the weakest performance month since September 2023, when gold dropped by around 4.7% on the back of the “higher-for-longer” Fed rate expectations.

Risky assets benefited in November

Courtesy of the US presidential elections, November has been an extremely eventful and volatile month. Risky assets have rallied, with the cryptocurrency market benefiting the most. Despite bitcoin failing to break above the $100k level, it is up 37% in November, with the remaining key cryptos enjoying even stronger returns.

US equity indices survived a mixed earnings round, ending November in the green, led by the Dow Jones index. The stars of the month, though, have been the small-cap stocks, with the Russell 2000 index being very close to achieving the second 10%+ monthly return of 2024. Considering that the customary Santa Claus rally could still lie ahead, there is a strong market belief that US equities could remain comfortably in the green until the festive season.

Strong dollar gains in November, with some exceptions

The US dollar has also recorded sizeable gains in November, outperforming both the pound and the euro. There are some exceptions though, as dollar/loonie is only 0.5% higher for the month, despite the ultra-dovish BoC. This trend could reverse today if the Canadian GDP report for the third quarter of 2024 produces an upside surprise.

Euro bulls try to recover part of their losses against the dollar 

It has been an extremely weak month for the euro, losing ground across the board. Despite the euro bulls’ attempts to stage a meaningful recovery this week, the euro’s outlook remains mostly largely bearish. Economic data have been weak, supporting the doves’ intentions for a strong rate cut in December and thus acting as a significant headwind for euro bulls’ efforts.

Following last week’s abysmal PMI surveys, the eurozone CPI report will be released today. With the German headline figure printing at 2.2% year-on-year increase, 0.1% below expectations, there is a risk for a similar downside surprise at the eurozone aggregate figure.

A small miss today is unlikely to change the outlook for the December ECB meeting, with the market currently pricing in a 20% probability for a 50bps rate cut. However, the thin trading conditions today could exacerbate market reactions, with euro/dollar potentially reacting more forcefully to a surprise figure.

Yen benefits from a strong Tokyo CPI report

The yen is having another strong day, as the latest set of CPI data from Tokyo keeps the door open to a BoJ rate hike in 20 days. Specifically, both the headline and core inflation indicators for November surged higher, above market expectations. Despite the weaker retail trade data, dollar/yen is recording another strong red candle, dropping below the ¥150 area.