Relief And Anxiety

By Jane Foley, Senior FX strategist at Rabobank

News that Scott Bessent is the top choice for incoming US Treasury Minister has raised the possibility that some ‘Trump trades’ may be watered down. Bessent, a successful macro hedge fund manager, is associated with a preference to reduce the US budget deficit to 3% of GDP, which clearly suggests less appetite for deficit spending. At the same time he is reportedly in favor of stripping back regulation to raise US growth to 3% and ‘layering in’ tariffs gradually. US stocks are higher on the hope that regulation may be cut while Treasury yields have fallen in response to what is considered to be a credible and fiscally hawkish choice by Trump. The USD has dipped in line with yields, but it is holding its place as best performing G10 currency in the month to date.

On Friday, EUR/USD dropped to its lowest levels in two years. The dismal PMI data from both France and Germany was the latest contributor to a move which has pushed the USD and the EUR to the opposite sides of the G10 FX performance table this month. The choice of Bessent as Treasury Secretary may have calmed a few nerves, but the consensus has been making clear its view that Trump’s tax and tariff policies will bring upside risk to inflation and limit the Fed’s ability to continue its rate cutting cycle.

Distinct from the strong USD backdrop, the story of EUR resilience that persisted through much of this year has caved in. Provisional November PMI data for Germany and France on Friday were a worrying harbinger of the economic gloom to come. The German numbers followed a downward revision to German final Q3 GDP to just 0.1% q/q. The story of stagnation in Germany is hardly new. However, in the first half of this year the market was clinging onto the expectation that growth would be lifted in H2 by rising real household incomes. The failure of the recovery to materialise is now forcing the market to confront the view that Germany’s adjustment to the loss of cheap Russian energy and a changed trading relationship with China could take a lot longer to adjust to. It is unclear whether fresh elections in Germany can bring a change in the country’s debt brake and the possibility of fiscal stimulus. Either way, the voices clamoring for more stimulus from the ECB are becoming louder. In an interview published this morning in Les Echos, ECB Chief Economist Lane stated that “monetary policy shouldn’t remain restrictive for too long. Otherwise, the economy won’t grow sufficiently, and inflation will fall, I believe, below target”. The ECB is widely expected to cut rates for the third consecutive time next month. France, of course, has its own problems. Last week, Marine Le Pen, head of the far-right National rally, indicated that her party could join the Left in voting for a motion of no confidence in PM Barnier should he fail to consider its concerns about the impact of his budget on consumer incomes. It is unclear exactly how French politics will play out. Oat yields eased a touch on Friday, but nerves remain frayed. We expect EUR/USD can hit parity on a 6-month view.

The COP 29 climate summit reached an agreement yesterday to triple the flow of climate finance to poorer countries. The deal, however, triggered anger from developing countries and accusations that the pledges will not address the enormity of the challenge that is being faced. Further doubts prevail over the commitment of the incoming US Administration on climate change.

Iran has reported that it will hold talks this week with France, Germany and the UK on issues that will include its atomic programme.