Geopolitical risks weigh heavily as markets move to safe haven assets

The European Central Bank’s (ECB) Chief Economist, Philip Lane, stated that “monetary policy should not remain restrictive for too long.” However, he emphasised that the fight against inflation is not yet over, as services prices remain elevated. Despite heightened political risks in Europe and global geopolitical uncertainties, the ECB Council expects inflation to decline to their 2% target by mid-2025. Lane also noted that the council will adjust borrowing costs on a meeting-by-meeting basis.

The Pound began the week on a firm note, with markets anticipating that the Bank of England (BoE) will reduce interest rates at a slower pace than the ECB or the Federal Reserve. Meanwhile, UK retail sales dropped by 0.7% in October as taxpayers curbed spending ahead of the UK budget announcement on October 30. Additionally, the Composite PMI—a key measure of manufacturing and services activity—fell below 50, signaling a contraction in UK economic output.

In the US, former President Donald Trump nominated Scott Bessent as the new Treasury Secretary. Bessent is regarded as a “safe pair of hands,” which reassured markets after he announced plans to “restrain US borrowing.” This move suggests that US interest rates may not fall as quickly as previously anticipated, boosting the US Dollar late last week. Markets will closely monitor upcoming appointments from the Trump administration for further insights into future monetary policy.

The German IFO business climate index fell to 85.7 in November from 86.5 in October. The current economic assessment also fell to 84.6 highlighting the economic and political weakness in Europe presently. The deteriorating trend has alarmed policymakers and markets now expect European interest rates to come down faster and deeper in an attempt to shore up the current economic activity across Europe. This could keep the single currency under pressure as we move toward year end.

The Bank of England’s Deputy Governor for Monetary Policy, Clare Lombardelli, said she supports a “gradual removal of monetary policy restriction”. She added that certain components of UK inflation remain elevated and need to be monitored closely and that Monetary Policy will be decided meeting by meeting as the council evaluate economic activity after the UK’s recent budget.

The US Dollar has started off the week slightly weaker as the newly appointed Treasury Secretary, Bessent, said that their priority will be to deliver on Trump’s tax-cut pledges. He added that “enacting tariffs and cutting spending will also be a focus as will maintaining the US Dollar’s status as the World’s reserve currency”. The week ahead sees the US celebrating Thanksgiving and so markets will likely remain subdued.

Source: EUbusiness