A dollar pullback on dovish comments
The dollar retreated after dovish comments from Fed officials tempered longer-term tightening expectations, shifting focus to US CPI data that could determine whether recent dollar weakness persists.
USD
The dollar’s winning streak paused on Tuesday, with the DXY falling 0.4%, helped by comments from New York Fed President Williams, who noted that one more hike “may be appropriate this year” while seeing no need for further tightening in 2027. That echoed earlier interventions from Governor Waller, who said higher long-term yields are restraining housing and autos in a way the Fed did not intend. So, while a December hike remains close to fully priced, with October at roughly one in five, downside pressure on expectations further out is now weighing against dollar gains. Whether that persists today depends on September CPI at 13:30 BST. Consensus looks for headline at 0.6% MoM and 3.6% YoY on gasoline, with core moderating to 0.2% MoM and 2.5% YoY. As we flagged in our week ahead, we expect an in-line print, which should leave Fed pricing largely untouched and the dollar modestly softer into Bowman, Barkin and the Beige Book. Core is the number that matters: though not our base case, a 0.3% monthly reading or above should undo much of yesterday’s dovish commentary, reviving October hike odds and lifting the dollar.
EUR
EURUSD recovered back above 1.12 on Tuesday as the French budget debate opened, though the move higher stemmed largely from dollar weakness, rather than domestic factors. Still, we think it is notable that the Socialists’ motion to reject the 2027 budget was defeated 236 to 149 after National Rally chose to let the debate proceed, removing the immediate risk that the bill was bounced to the Senate unread, and offering some relief for the single currency. Granted, the OAT-Bund spread remains near 140bp, with 10-year OATs at around 4.8%, but that represents stabilisation after several weeks of rising concern. It does not, however, remove all downside risk, and French fiscal worries remain the euro’s dominant domestic driver, and a revenue debate running up to the first major vote on October 20th keeps it in focus. Overnight, Lagarde told CNN in Bangkok that the solution to French borrowing costs “lies at home” - she speaks again at 09:30 BST. But barring any surprises, the primary EURUSD driver today should again come from the US, where an in-line US CPI could add to yesterday’s stabilisation narrative, allowing French yields to ease at the margin and EURUSD to hold above 1.12, with 1.11 the key downside level if the data beats expectations.
GBP
Sterling was a passenger on Tuesday, gaining against the dollar but trading rangebound versus the euro, keeping EURGBP near one-year lows. Domestic news was marginally supportive: BRC like-for-like sales rose 1.0% in September, above expectations, and Bailey told CNN that firms are focused intensely on cost containment and that energy pass-through into broader inflation has so far been subdued, while warning that “the longer this goes on, the harder it gets”. Markets continue to price a 25bp hike to 4.00% on 5 November as a near certainty. Bailey spoke again in Bangkok at 06:30 BST, and Pill is also due on the wires today. Beyond that, the UK calendar is empty until Thursday’s August GDP print. We continue to think the market is under-pricing fiscal risk ahead of the Budget on October 28th, with 10-year gilts above 5.4% and headroom thin, so we retain our bearish bias into month-end. For today, cable will follow the dollar’s reaction to CPI; an in-line print supports a push towards 1.33, but we would look to fade sterling strength.
CAD
The loonie was one of Tuesday’s better performers, gaining around 0.5% as Canadian markets returned from Thanksgiving, with USDCAD slipping to around 1.42 over the course of the day. While the greenback did much of the work, oil helped at the margin. WTI closed near $94, its strongest since late September, after the Dhahran strike and reports that Iran is using new tactics to target vessels near Hormuz. There is little on the Canadian calendar today beyond August building permits at 13:30 BST. BoC Governor Macklem’s IIF fireside chat in Bangkok will likely prove more interesting. We are yet to see any remarks, but after Friday’s 68k employment drop, headlines could be impactful. In our view, the Bank of Canada should hold at 2.25% this month, and we expect the remaining roughly one-in-four chance of a hike to fade, particularly if the October 19th CPI print is benign. A hint in that direction from Macklem could accelerate any pullback, with US CPI this afternoon the other key catalyst for traders to watch.