Election risk ahead of tomorrow’s FOMC decision

USD

The dollar firmed on Monday, with the DXY closing just above 102 ahead of tomorrow’s FOMC decision. The move came despite a modest retreat in oil, though Brazil added an EM risk-off impulse, with the real down over 8% after Lula’s surprise win. Today brings durable goods at 12:30 GMT and Conference Board consumer confidence at 14:00 GMT, expected to slip to 81.0 as fuel costs bite. With a Fed hold at 3.75-4.00% all but certain, we expect the dollar to keep its gains into Wednesday, with Middle East headlines and today’s Israeli election the main swing factors.

EUR

EURUSD slipped below the 1.12 handle to start the week, despite a better-than-expected IFO survey. The business climate indicator rose to 90.2 against a prior reading of 89.9. Still, French risk remains the dominant theme for the single currency. The OAT-Bund spread narrowed to around 156bp from last week’s peak near 178bp after Moody’s affirmed France’s Aa3 rating on Friday, yet French ten-year yields still sit above Italy’s, and weekend protests underline the obstacles facing the 2027 budget. Today’s calendar is light, with only French consumer confidence and Spanish unemployment data to watch for, so direction should again come from the dollar, oil and the Middle East. With no signs of a resolution to the latter conflict, and French fiscal troubles unlikely to fade, we continue to favour euro downside near term.

GBP

Sterling lost ground against the dollar on Monday, with GBPUSD closing in the low 1.33s, having failed to hold above 1.34 last week. With no UK data, attention is firmly on tomorrow’s Budget at 12:30 GMT, Chancellor Healey’s first. Our base case remains a low-key Budget with headroom around £15bn and major spending decisions deferred to 2027, which should leave sterling relatively unmoved on the day, though gilts will scrutinise the credibility of longer-term spending commitments. Today’s calendar is again empty, meaning cable is likely to track the broader dollar and the oil-driven risk tone, with Middle East headlines and the Israeli election the main sources of volatility. We continue to see GBPUSD contained in a 1.33-1.34 range near term, with risks skewed lower into month-end.

CAD

The loonie’s seven-session winning streak ended on Monday, with USDCAD steadying around 1.40. Oil offered little support, with WTI settling 1.5% lower as hopes of de-escalation after the Tehran talks outweighed continued Houthi attacks on Saudi energy infrastructure, while a firmer dollar ahead of the Fed and broad EM weakness after Brazil’s election capped CAD gains. With no Canadian data on the calendar today, the focus is squarely on tomorrow’s Bank of Canada decision at 13:45 GMT. While swaps price a near 90% chance of a 25bp hike to 2.50%, we continue to think a hold at 2.25% with hawkish guidance is the more likely scenario, given easing core inflation, a weakening labour market and limited breadth in price pressures beyond energy. That outcome would leave the loonie exposed, and we see scope for USDCAD to move back toward 1.42.

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