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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market www.xmxmxm.cnmentary]: Can US data revive risk appetite in a low liquidity week?". Hope this helps you! Original content below:
This has been a tough time for risk assets, with stocks feeling the pressure throughout the week. At one stage, the three major US indexes were 5.5%-8.5% below their recent highs, and technical analysis produced a very bearish short-term signal. This market jitters was evident with one-month implied volatility climbing to new monthly highs.
Interestingly, Nvidia's strong earnings report on Wednesday and its CEO's upbeat www.xmxmxm.cnments failed to sustain the negative momentum. Investors continue to question the backlash from www.xmxmxm.cnpanies seen as leaders in artificial intelligence, as well as investment announcements that exceed their current financial and manufacturing capabilities. If AI-related concerns persist, it will be difficult for risk assets to stage a meaningful rebound.
The situation is even worse for cryptocurrencies. As of this writing, Bitcoin is trading at around $83,000, 35% below its all-time high of $126,000, all but erasing its post-April gains. The cryptocurrency king is down 18% for the week — its strongest weekly decline since mid-November 2022 — while November’s monthly performance is on track for its worst since the June 2022 correction.
In addition to artificial intelligence, the hawkish Fedspeak has also been labeled as the main culprit of negative risk appetite. The probability of an interest rate cut in December has plummeted to 27% from 90% before the October meeting. The hawks have been extremely vocal recently, emphasizing that the lack of clear data is the biggest obstacle to further interest rate cuts. The minutes of the latest FOMC meeting confirmed this hawkish stance, and the Fed’s dovishPai is eager to gather enough evidence to convince the board of the need for further easing.
The focus next week will likely be on the revised U.S. data calendar. Due to the lack of October CPI report, next week's PCE data will be crucial for Fedspeak; the soft report may awaken current low expectations for December and support risk appetite.
Having said that, consumer confidence may play a bigger role in the future. Continued weakening willingness to spend is likely to result in significantly weaker GDP growth in the fourth quarter, underscoring the damage caused by the shutdown. As a reminder, the recently passed bill funds the federal government until January 30, so the risk of another shutdown cannot be underestimated.
It is worth noting that due to the US Thanksgiving holiday and Black Friday on Thursday, the market will be shortened next week, when the US market will close early and liquidity will be significantly reduced.
In this mixed environment, there are several variables that could materially change market sentiment.
Although trade tensions have eased, there are some issues behind them that may lead to the outbreak of conflict. Specifically, there is uncertainty about the U.S. government’s stance on foreign-made chips — will Trump impose steep tariffs? and the “Access to Artificial Intelligence” bill currently being debated in Congress. The bill requires U.S. chip www.xmxmxm.cnpanies such as Nvidia to limit exports and prioritize domestic customers, which could anger China.
The second variable is the new US-brokered peace agreement between Ukraine and Russia. Although the plan appears to favor Russia, and Ukrainian officials initially reacted negatively, the current agreement may be the only way to restart negotiations between the two sides.
Concrete progress on a resolution would help boost risk appetite but undermine gold's current appeal. Precious metal prices falling to $4,000, failing to take advantage of the weakness in the stock market, may expose their own weaknesses, such as an overstretched rally in 2025. A rise to the late-October lows of $3,886 could challenge the long-term bull trend.
While the U.S. government’s reopening and hawkish Fed www.xmxmxm.cnments failed to boost the U.S. dollar, the current weakness in the stock market is a different story. The US dollar has risen this week, with EUR/USD testing the 1.1500 range again. A boost from the Fed in December lowered expectations, rising risk appetite and positive news on the geopolitical stage, which could weaken the dollar's appeal next week.
Meanwhile, Eurozone news flow remains subdued as most ECB members are satisfied with the current stance of monetary policy. Minutes from the European Central Bank's last meeting on Thursday are expected to confirm the current pause in interest rates, with focus quickly turning to Germany's preliminary inflation report due on Friday. There were no major downside surprises in the data, making the last ECB meeting in 2025 more of a formality than a spectacle to attract market attention.
After months of speculation, Chancellor of the Exchequer Reeves will submit the 2026 Budget in Parliament on Wednesday, November 26. Market attention will be focused on the magnitude of the tax increase as Reeves attempts to close the current £20 billion fiscal gap to stay in line with his own fiscal rules and expand fiscal surplus. Plans to raise personal taxes have been abandoned, but other revenue sources will be explored and a property tax increase may even be considered.
With the recent rise in government bond yields and the sharp weakening of the pound, the budget could become a critical moment. Aggressive tax increases may initially satisfy the market, but they may also trigger a serious government crisis and challenge Prime Minister Starmer's ability to govern. The result is likely to be higher government bond yields and a weaker pound.
A tax-light budget may also trigger a negative reaction in the market, as the Labor government will be seen as lacking the determination to make difficult decisions. Rising yields are negative for GBP, with GBP bears expecting a drop to the April 7, 2005 low of 1.2707 GBP/USD.
The Bank of England will have to pick up the slack in the budget, with there now being an 82% chance of a rate cut in December after October's consumer price index (CPI) report softened. The strong market reaction after the budget announcement may further support current rate cut expectations, bringing forward the next 25 basis point rate cut - after the December meeting - now fully priced in July.
With President Ueda still offering conflicting messages on the timing of the next rate hike and Prime Minister Takaichi announcing a new stimulus package of 2.13 million yen ($135 billion) - the largest since 2022 - the yen remains under pressure. Key Tokyo CPI releases next Friday could surprise and push the yen slightly higher, but that may not be enough to turn the tide.
Meanwhile, verbal intervention also intensified as USD/JPY reached 157.88 on Thursday. If this trend continues and USD/JPY breaks through the 2025 high of 158.66 and approaches the key 160 mark, the likelihood of actual intervention will increase. Notably, with market liquidity expected to be low in the second half of next week, this may be the best time for the Bank of Japan to intervene and achieve real declines in USD/JPY.
The latest developments in the Ukraine-Russia conflict have taken center stage, and a possible ceasefire agreement has greatly affected the outlook for the oil market, further exacerbating the current growth of shorts and oversupply. Bears are eager to retest the October lows, not far from the five-year low of $55.60 posted in early May.
On the other hand, the failure of Ukraine-Russia negotiations and an escalation on the battlefield - with Ukraine potentially targeting Russian oil and gas infrastructure - could cause oil prices to rise, reversing the current bearish trend.
With the Australian, New Zealand and Canadian dollars all falling sharply against the US dollar, next week's calendar may offer them a chance at redemption. Australia's CPI report, Reserve Bank of New Zealand meeting and Canada's third-quarter GDP are likely to set the tone for the rest of the year. Notably, the Australian dollar appears best placed to take advantage of renewed USD weakness, while New Zealand remains the weakest as the RBNZ remains on an aggressive easing path.
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