Global Currency Markets: A Weekly Review
The global currency markets experienced a relatively stable week, with most currencies remaining within a narrow range. This stability was largely due to a softer-than-expected US inflation print, which reinforced expectations of future Federal Reserve rate cuts.
US Economic Data
The US economic data released during the week provided mixed signals. The headline inflation slowed to 2.7% year-on-year in November, while core inflation eased to 2.6%, the lowest since early 2021. Labour market data showed modest job gains and a rise in the unemployment rate to 4.6%, though consumer demand remained resilient, supported by stronger retail sales.
Currency Performance
The US dollar remained mildly softer and range-bound, while the Indian rupee stood out as the top performer, appreciating 1.6%. The Indian rupee witnessed heightened volatility during the week and appreciated ~1.27% after hitting fresh all-time lows of Rs 91.09 against USD. In contrast, the yen weakened after the Bank of Japan’s rate hike announcement, with USD/JPY rising toward the 157-158 range.
Bank of Japan’s Rate Hike
The Bank of Japan raised its policy rate by 25 basis points to 0.75%, the highest level in three decades, in a unanimous decision. However, the yen weakened after the announcement as real interest rates remained deeply negative and policymakers offered limited clarity on the timing of further tightening.
European Central Bank and Bank of England
The European Central Bank held its deposit rate steady at 2% for a fourth consecutive meeting, maintaining a data-dependent stance. The Bank of England, on the other hand, delivered a 25-basis-point rate cut to 3.75% following a narrow 5-4 vote. While policymakers expressed confidence that inflation will approach the 2% target by spring 2026, weaker near-term growth prospects and a cautious policy tone weighed on sterling.
Looking Ahead
Market participants remain focused on upcoming US growth and inflation data, including the third estimate of third-quarter GDP and core PCE inflation figures. Analysts expect the dollar to remain range-bound, with future direction hinging on the pace of US disinflation, labour market conditions, and evolving global monetary policy divergence.
Conclusion
In conclusion, the global currency markets experienced a relatively stable week, with most currencies remaining within a narrow range. The US dollar remained mildly softer, while the Indian rupee stood out as the top performer. The Bank of Japan’s rate hike and the European Central Bank’s decision to hold rates steady had significant impacts on the currency markets. As market participants look ahead to upcoming US growth and inflation data, the future direction of the dollar and other currencies remains uncertain, depending on various factors such as US disinflation, labour market conditions, and global monetary policy divergence.
