25 Nov 2024

The EUR/GBP exchange rate has strengthened to approximately 0.8320 during the early hours of trading in Europe on Monday. However, the potential for further gains in the shared currency may be constrained by increasing speculation that the European Central Bank (ECB) will pursue significant interest rate reductions to support the struggling regional economy.

Market participants are increasing their expectations that the ECB may implement a larger half-point rate cut following the disappointing Eurozone Purchasing Managers Index (PMI) data released on Friday. This development could lead to additional selling pressure on the Euro (EUR) in comparison to the Pound Sterling (GBP).

Matthew Landon, a global market strategist at JP Morgan Private Bank, remarked, "This report truly puts a 50-basis-point cut on the table for December." Furthermore, Martins Kazaks, a member of the ECB Governing Council, indicated that the central bank should consider lowering interest rates next month in light of the weak economic conditions.

The recent decline in UK Retail Sales and PMI data may enhance the dovish outlook for the Bank of England (BoE) in December, potentially exerting downward pressure on the GBP. Data from the Office for National Statistics (ONS) released on Friday revealed that UK Retail Sales fell by 0.7% month-on-month in October, compared to a revised increase of 0.1% in September. This result was below the market consensus of a 0.3% decline.

Nevertheless, the cautious approach adopted by BoE officials may help mitigate further losses. Traders will be attentive to the speeches from Monetary Policy Committee members Clare Lombardelli, Swati Dhingra, and Huw Pill on Monday for additional insights.

Japanese Yen sellers currently hold a dominant position due to uncertainties surrounding potential rate hikes by the Bank of Japan (BoJ) and a prevailing risk-on sentiment in the market. In a significant development, US President-elect Donald Trump has appointed notable investor Scott Bessent, known for his fiscal conservatism, as Treasury Secretary. This appointment has instilled confidence in the bond market, resulting in a decline in yields across various sectors.

After experiencing an eight-week upward trend, the US Dollar has begun to pull back from its peak, the highest since November 2022, as traders decide to secure profits following the substantial rally triggered by the US elections. Although Japan has reported stronger consumer inflation figures and BoJ Governor Kazuo Ueda has made hawkish statements, the prevailing domestic political instability may hinder the BoJ's ability to tighten its monetary policy.

In parallel, investors are reducing their expectations for an additional 25-basis-point rate cut by the Federal Reserve in December, driven by concerns that Trump's economic policies could lead to increased inflation. The CME Group's FedWatch Tool indicates that traders are assigning a probability of just over 55% for a rate reduction next month, while nearly 45% anticipate that rates will remain unchanged.

The optimism surrounding the new Trump administration's business-friendly policies has been bolstered by the flash US Purchasing Managers' Index (PMI) data, which reveals that business activity reached a 31-month high in November. S&P Global reported that the Composite US PMI increased to 55.3 this month, marking the highest level since April 2022, suggesting a potential acceleration in economic growth for the fourth quarter.

Additionally, reports indicate that a ceasefire agreement between Israel and the Lebanese militant group Hezbollah is imminent, further enhancing the risk-on sentiment and potentially limiting the upside for the safe-haven Japanese Yen. This week, attention will be directed towards the US Personal Consumption and Expenditure (PCE) Price Index data, which may provide insights into the Federal Reserve's interest rate trajectory and serve as a catalyst for market movements.

USD/JPY could appreciate further and aim to reclaim the 155.00 psychological mark

From a technical standpoint, the recent acceptance below the 100-period Simple Moving Average (SMA) appears to have established a foundation for a potential further decline in the USD/JPY pair. Nevertheless, any additional downturn may encounter support in the vicinity of the 153.30-153.25 area. This is succeeded by the significant 153.00 level, which, if breached decisively, would likely serve as a new catalyst for bearish traders, leading to more pronounced losses. Consequently, spot prices could accelerate their descent towards the next pertinent support level in the mid-152.00s, ultimately approaching the crucial 200-day SMA, currently situated around the 152.00 threshold.

Conversely, the 154.00 level now appears to function as an immediate barrier ahead of the Asian session peak, located around the 154.40 area. A continuation of buying momentum could enable the USD/JPY pair to regain the psychological 155.00 level and advance further towards the 155.40-155.50 supply zone. Sustained strength beyond this zone would likely facilitate a movement past the 156.00 mark, aiming to retest the multi-month high around the 156.75 region reached on November 15.