Attention on the buck ahead of US CPI
The dollar ended last week on the front foot. Friday’s October payrolls beat on every line: employment rose 165k against a 70k consensus, unemployment fell to 4.1% and average hourly earnings grew 0.4% on the month.
USD
The dollar ended last week on the front foot. Friday’s October payrolls beat on every line: employment rose 165k against a 70k consensus, unemployment fell to 4.1% and average hourly earnings grew 0.4% on the month. We had flagged upside risks, but the scale of the beat exceeded even our expectations. Unsurprisingly, odds of a 25bp hike at the December FOMC meeting climbed back to around 80% from 67% on Thursday, and the DXY rose 0.7% to 102.3. That said, the dollar has not held all of those gains over the weekend, with Middle East news mixed. Houthi missiles struck Riyadh, and Washington extended its blockade of Iran, yet President Trump said on Sunday that renewed strikes were “highly unlikely” while Qatar-mediated talks progress. With Asian equities also rebounding, the dollar’s haven bid has faded a touch this morning too. But ahead of tomorrow’s CPI, where we see upside risks to the 0.3% headline and 0.2% core consensus, we stick with our week-ahead view: don’t bet against the buck.
EUR
EURUSD fell 0.7% on Friday as the US payrolls beat compounded haven flows that had already stalled the euro’s post-midterm rally. Still, the sharp fall in Brent seen last week on hopes for US-Iran talks is a modest tailwind for the single currency, easing the eurozone’s terms of trade problem at the margin. That aside, the calendar is thin today, with only Cipollone speaking at 16:00 GMT. Lane and Escriva follow tomorrow, Nagel and Kazaks on Wednesday, and the second estimate of Q3 GDP on Friday should confirm 0.4% QoQ growth. We expect EURUSD to remain under pressure into tomorrow’s US CPI print.
GBP
Sterling’s seven-week high did not last long. Having threatened 1.35 on Thursday after the Bank of England’s 25bp hike to 4.00%, GBPUSD finished Friday in the mid-1.33s as firm US payrolls and risk aversion hit the high-beta pound. Markets now price a December move at roughly 50/50, and we have updated our baseline to embed one more hike to 4.25% on December 17th after last week’s rate decision. That said, we also expect this to be followed by an extended pause, a more dovish path than markets imply. Governor Bailey speaks in Zurich at 17:25 GMT, and we will be listening for any softening of his “not the start of a long series” message for confirmation. Lombardelli and Pill speak tomorrow, before Thursday’s preliminary Q3 GDP, where consensus looks for 0.7% QoQ growth.
CAD
The loonie was Friday’s standout underperformer, as anticipated. The October Labour Force Survey showed employment falling 4.7k against expectations for a 15k rebound, with unemployment rising to 6.7% from 6.5%, private-sector payrolls down 52.5k and wage growth slowing to 2.2%. Alongside the blowout US payrolls, that was enough to push USDCAD not only through 1.40 but also above 1.41. Pricing for a follow-up Bank of Canada hike on December 9th slipped to around 35% after October’s move to 2.50%, and tomorrow’s Summary of Deliberations at 18:30 GMT will show how much weight was placed on the softening labour market. Crude offers little comfort either, with WTI settling near $90, and has slipped further this morning as Trump’s comments on US-Iran talks weigh on the war premium. With no Canadian data today, we expect USDCAD to hold around 1.41, with tomorrow’s US CPI the next catalyst.