The US dollar confirms that it remains a safe haven for investors worried at times of global conflict.
Maduro's capture, US seizure of unregistered oil tankers, Trump's threats on Denmark and the Iranian protets all contributed to a sense of anxiety and the dollar rallied against its peers, as did gold. The December payroll report on Friday had little impact on markets, other than confirming that we are unlikely to see a Fed cut later this month. Notable outperformance came from Latin American currencies, in spite of the Venezuela crisis, once again showing that the world increasingly views the region as relatively isolated from global turmoil.
Next week, markets will focus on the critical US CPI inflation report for December, which releases on Tuesday. Because the previous month's report was plagued by insufficient data due to the federal shutdown, this week's number packs twice as much information as usual. While data from the Eurozone will be sparse, significant November economic data, particularly monthly GDP growth, is due on Thursday. In addition, we expect unpredictable geopolitical developments on a number of fronts.
USD
The December employment report did ot change in the leats the narrative abiout the US labor market: steady growth and a low fire, low hire labor market. The most heopful data point was a tick down in the unemployment rate. This confirms that this unusual economy is nowhere near a traditional recession. This week's inflation data is perhaps the most important report in months. Much of the consensus around the path of Federal Reserve cuts has been built on the expetcations that inflation is headed down, hwoever gently, and needs to be cofnirmed by this week's data.
GBP
The December PMI indices revised business activity lower, and the tone of UK data released last week was generally downbeat. As a result, Sterling underperformed somewhat most other European currencies, particularly the Euro. Nevertheless, traders continue to pare their bets on Bank of England cuts, and now expect less than two full 25bp moves in 2026. Relatively high rates should continue to support the pound.
EUR
Germany's troubled industrial sector saw some genuinely hopeful reports last week. November industrial production surprised to the upside. Even more surprising was a blowout number for factory orders, which bodes well for future activity and may signal that the impact from the massive fiscal stimulus and defense spending package is finally starting to be felt. With inflation seemingly under control, the ECB is in a good place to keep rates steady throughout 2026. The progressive closing of the interest rate gap with the US and positive economic news should support the common currency over the next few weeks.
