USD
After what initially looked to be a slow start to the week, the dollar ended Monday trading on a high, helped largely by comments from Chair Powell overnight. Notably, he appeared to suggest that the FOMC favours a much less aggressive easing path than priced by markets. While this had been incorporated in the Fed’s dot plot, seen only two weeks ago, perhaps the key change in yesterday’s speech was that this view was supported by the recent GDP revisions. Powell noted an upgrade to the savings rate in particular as removing a downside risk, something that we flagged at the time as significant, but overlooked by markets. The upshot is that market easing expectations for the Fed, which had begun the week pricing 3 rate cuts by year-end, now see just 2.7. The dollar gained 0.4% on the back of this move, and given our view that the Fed is only likely to deliver 2 rate cuts by year-end, we think this greenback rally has further to run.
Other news overnight should also help support our bullish dollar call too. Specifically, Israel has begun a ground incursion into Southern Lebanon. While this is yet to trigger a haven bid of note, this still represents a major escalation in the Middle East, a dynamic that should favour dollar upside. Beyond this, JOLTS job openings and ISM manufacturing readings are the key data points of note coming up today, while a handful of Fed speakers are also set to hit the airwaves. All told, we think this collection of events should do little to disrupt the narrative set up by Powell overnight, meaning we continue to believe the greenback should climb heading towards Friday’s critical payrolls report.
EUR
While Powell was arguably the main event on Monday, ECB President Lagarde also made an appearance, speaking to the European parliament. Indeed, while her comments did not have quite the effect on markets as those of her US counterpart, we nevertheless think they were just as significant for the fortunes of EURSUD. As we see it Lagarde gave the clearest steer yet towards the idea that the ECB is about to step up their easing cadence, suggesting that inflation pressures were easing faster than had been expected. We would argue that the ECB is a little behind the curve on this point. Growth has fallen off a cliff, and CPI figures from France Germany, and Spain all suggest that inflation is now following suit. This point should be confirmed at 10:00 BST today, with the publication of aggregate eurozone price growth readings. Markets look for headline CPI to fall from 2.2% to 1.8%. We think the odds are skewed towards an even larger fall. In any case, this is a sharp drop off in price pressures, and should support the ECB moving to cuts at a pace of once per meeting. If we are right, and markets take a similar view later this morning, then EURUSD downside should be in store, with 1.11 in range for the pair.
GBP
Sterling outperformed on Monday, despite a lack of domestic drivers. The pound traded sideways against the dollar, while notching gains versus the euro as events elsewhere took centre stage in traders’ minds. A similar dynamic should be the base case today as well. The only UK event of note for traders to contend with is a speech by BoE chief Economist Huw Pill, and with a rate cut fully priced in November, we think there is little he can do to upset market expectations when he speaks at 15:00 BST.
CAD
Similar to the pound, it should be a quiet day coming up for the loonie as well. Only September’s manufacturing PMI is scheduled for release, and this is unlikely to disrupt a narrative that the Canadian economy continues to underperform. Instead, we expect that Fed expectations will remain in the driving seat for USDCAD. These saw a modest climb for the pair on Monday, with further headway likely in store today as well if our expectations are met.
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