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Impact Of US Economic Data

The latest US inflation data for November showed a rate of 2.7%, which was below expectations and highlights a cooling trend. As a result, the US dollar has weakened significantly, with markets now anticipating a shift from the Federal Reserve. Futures indicate a greater than 70% chance of a rate cut by the March 2026 meeting. The euro has gained strength against the dollar, but the European Central Bank is concerned about this rapid rise. Comments from Lagarde about monitoring the euro’s increase suggest they may intervene verbally to manage this trend for their own inflation goals. This could limit the EUR/USD’s upward movement in the short term. The Bank of England surprised the market by cutting rates, yet the pound sterling rose above 1.3400. This indicates that traders are more focused on the weak US dollar narrative than the Bank of England’s monetary policy. Currently, derivative strategies may favor the dollar’s weakness over the pound’s underlying fundamentals. Gold prices have surged towards $4,350 as the dollar and Treasury yields have declined. The expectation of prolonged lower interest rates reduces the opportunity cost of holding gold, which does not yield interest. Historically, a weakening dollar and falling real yields have greatly benefited precious metals. The Mexican peso is showing strength, bolstered by robust domestic data, including a recent 3.4% rise in October retail sales. Mexico’s higher interest rates compared to the US make it an appealing currency, especially as the “nearshoring” trend continues to boost its economy. This reinforces the case for holding MXN against the USD. Overall market volatility is decreasing as we near the year’s end, with the VIX dropping below 13 last week. This indicates that traders are adopting a “risk-on” sentiment as we head into the holiday season. Selling volatility through options strategies could be beneficial unless significant geopolitical events occur. Create your live VT Markets account and start trading now.

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