Dollar dips likely to stay shallow
Overnight, the Middle East has set the tone. Three days of Qatari-mediated talks with Iran have produced a proposed two-day plan to reopen the Strait of Hormuz, pushing Brent down close to 3% to around $110.
USD
Friday delivered another AI-driven equity rout, though the dollar staged a comeback through the afternoon, managing to make it out of the day little changed. Still, the Nasdaq fell sharply after Intel and Amazon earnings disappointed, and a repeat dash into Treasuries dragged two-year yields down to 4.58%, leaving the DXY just below 102, flat on the week. Data, meanwhile, had minimal impact, with the Q3 employment cost index up 0.8% as expected, and Chicago PMI slipping to 55.3. But Musalem and Barkin both argued that rates need to rise further, keeping a December hike around 75-80% priced. Overnight, the Middle East has set the tone. Three days of Qatari-mediated talks with Iran have produced a proposed two-day plan to reopen the Strait of Hormuz, pushing Brent down close to 3% to around $110, even as mine strikes on two tankers and an attack off the Saudi coast underline how fragile the situation remains. With Trump having ruled out fresh strikes before tomorrow’s midterms, but his advisers signalling action could follow soon afterwards, we doubt the risk premium fades far. Today brings ISM manufacturing, with consensus at 54.7, and Goolsbee. We continue to see dollar dips as worth fading ahead of Friday’s payrolls, where risks skew to the upside.
EUR
Friday’s eurozone data cut both ways. Q3 GDP grew 0.4% QoQ, double the 0.2% consensus and our own expectation, but the headline was flattered by an idiosyncratic jump in Irish output, with France contracting 0.1% and Italy flat. German inflation then undershot, slowing to 2.8% from 3.3% against the 3.0% consensus had pencilled in, delivering some good news for ECB ratesetters. The net effect was a marginally softer EURUSD, down 0.4% on the week following the ECB’s Thursday hold. This morning the retreat in oil on hopes for progress in Doha offers some relief to an energy-importing bloc, though we remain sceptical this proves durable. Today is quiet, with final manufacturing PMIs and ECBspeak top of the docket ahead of Wednesday’s flash HICP, where consensus expects 4.0%. That should ensure that the dollar dictates price action, likely biased toward modest euro downside.
GBP
Sterling spent Friday consolidating Thursday’s post-Budget gains, with GBPUSD closing out the week just below 1.34, surprising in our eyes given the headwinds likely to face the pound over coming months. Indeed, looking ahead, money markets now almost fully price a hike at Thursday’s MPC meeting, with three to four additional rate increases expected over the following year. While we expect a 25bp hike to 4.00% on a 7-2 vote, with Dhingra and Taylor dissenting, we think the guidance will skew dovish relative to pricing and that December brings a pause. If correct, that should take some of the wind out of sterling’s sails after a solid recent run. Add the £30-50bn of annual spending pressures left unaddressed in the Budget and the OBR’s 2027 growth downgrade to 1.0%, and we see little reason to chase sterling higher. With the MPC in its quiet period and only final manufacturing PMIs today, we expect the pair to hold near 1.34 before drifting towards 1.33 on a dovish hike.
CAD
Friday’s August GDP print vindicated our scepticism about the Bank of Canada’s hike, even if the loonie refused to notice. Output was flat against the 0.2% consensus following no change in July, while the advance estimate pointed to a 0.1% contraction in September. Despite this, USDCAD closed near 1.40 as Brent ended October at a six-month high, and falling US yields weighed on the dollar, capping the loonie’s best month since April. This morning, however, the oil tailwind has reversed, with Brent down close to 3% as the Doha talks progress. And with markets still pricing roughly 45% odds of a December hike, we see conditions building for a USDCAD rebound. Catalysts for such a move are plentiful this week, with Macklem and Rogers testifying before parliament tomorrow, and Friday’s labour force survey, where consensus expects a 12k gain, sees risks of unemployment rising towards 6.6%. All told, we continue to see USDCAD drifting towards 1.41-1.42 as Canadian rate pricing fades, with divergent US and Canadian jobs data the likeliest driver.