Key Points to Watch Out For:
- Will the NFP data confirm bets on a Fed pause?
- Loonie traders await employment numbers.
- Australia’s GDP could test the credibility of May RBA rate cut bets.
- The euro may take cues from ECB President Christine Lagarde’s statements.
NFP and ISM PMIs to Influence Fed Projections
The U.S. dollar softened last week, retreating slightly after being temporarily boosted by President-elect Donald Trump’s tariff threats against China, Canada, and Mexico. Traders appeared to unwind Trump-related long positions ahead of Thanksgiving and in anticipation of this week’s major data releases. Market sentiment still reflects concern about the potential implications of policies under President-elect Trump.
Fed fund futures indicate a strong possibility of a pause by the Fed later this year. The likelihood of holding off in December stands at 35%, increasing to 58% for January. Notably, there is a 27% chance that the Fed will refrain from cutting rates at both meetings.
This week, market participants will closely monitor the ISM Manufacturing and Non-Manufacturing PMI data for November, scheduled for release on Monday, December 2, and Wednesday, December 4, respectively. However, the most critical release will likely be the Non-Farm Payrolls (NFP) data on Friday, December 6.
Given higher-than-expected October inflation, the price sub-indices in the PMI reports will be scrutinized for signs of whether price pressures persisted into November. Employment indices will also be evaluated to gauge labor market performance ahead of Friday’s official employment data.
Should the ISM PMIs affirm that the U.S. economy remains robust, it would increase the chances of the Federal Reserve maintaining its current rate stance, potentially strengthening the dollar. However, the magnitude of any dollar rally will hinge on Friday’s employment figures. After October’s 12,000 jobs added—the smallest increase since December 2020—November’s NFP must exceed 200,000 to meet market expectations and bolster confidence in the dollar’s uptrend.
Additional U.S. labor market insights will come from October’s JOLTS job openings on Tuesday, December 3, and the November ADP employment report on Wednesday, December 4.
Bank of Canada: Is a Second 50 Basis Point Cut Likely?
On the same day as U.S. employment data, Canada will release its own November employment report. During its October 23 meeting, the Bank of Canada (BoC) slashed rates by 50 basis points to support economic growth and maintain inflation near 2%, signaling that further cuts might be needed if the economy evolves as expected.
While investors initially saw a high likelihood of another 50 basis point cut, better-than-expected October CPI data tempered these expectations. Currently, the chance of a 50 basis point cut has fallen to 25%, with markets favoring a quarter-point cut as sufficient.
A strong employment report on Friday could further diminish the likelihood of another 50 basis point cut, lending some support to the Canadian dollar. However, even solid data may not be enough to reverse the currency’s downward trajectory. Additional tariff threats from President-elect Trump targeting Canadian goods could add further pressure on the loonie.
Australia’s GDP Could Prolong RBA’s Pause
Australia will release its Q3 GDP data during the Asian session on Wednesday, December 4. The Reserve Bank of Australia (RBA) remains the only major central bank that has yet to cut rates during the current easing cycle, with market participants anticipating the first 25 basis point cut in May.
Recent inflation data showed the weighted CPI holding steady at 2.1% year-on-year, while the headline rate edged up to 2.3% from 2.1%. Quarterly data revealed weighted and trimmed averages of 3.8% and 3.5%, respectively. These figures suggest the RBA might delay rate cuts further if GDP growth is robust.
A strong GDP figure could bolster the Australian dollar, though like the Canadian dollar, it remains vulnerable to U.S.-imposed tariffs. President-elect Trump has previously threatened to impose even larger tariffs on China, which could indirectly weigh on the Australian economy.
Eurozone: ECB’s Lagarde Speech in Focus
In the eurozone, preliminary German inflation figures for November came in below expectations but still showed some tightness, with the headline rate rising to 2.2% year-on-year from 2.0%. The eurozone’s overall headline rate also increased from 2.0% to 2.3% year-on-year.
Despite disappointing PMI data, ECB member Isabel Schnabel highlighted that rate cuts should be progressive. This stance has increased the market bias for a 50 basis point cut at the ECB’s next meeting, with current odds standing at 20%.
Euro traders will closely follow ECB President Christine Lagarde’s speech to the European Parliament’s Committee on Economic Affairs and Monetary Policy (ECON) on Wednesday, December 4. Traders will be looking for more details about the ECB’s policy plans, especially in light of the inflationary backdrop.
Conclusion
This week’s economic calendar offers critical insights across regions. U.S. labor market data and PMIs will shape Federal Reserve expectations, while Canadian and Australian data could influence monetary policy outlooks for their respective central banks. The eurozone’s inflation and ECB developments remain key focal points for euro traders. Against this backdrop, geopolitical tensions and trade policy developments could further influence market sentiment.
