Stabilisation likely ahead of the weekend

USD

The dollar’s post-CPI rally unwound further on Thursday, with the DXY slipping lower to trade either side of 102.0, even as September PPI blew past expectations. Headline producer prices rose 1.3% MoM against a 0.5% consensus, taking the annual rate to 6.3%, while retail sales jumped 0.8%, though a 0.1% control group print suggested gasoline rather than discretionary spending did the work. In any case, markets looked through the data after a selloff in AI-linked credit triggered sharp losses across Asian equities, and Fedspeak stressing no urgency to move this month left October hike odds under 15%. That fits our view that the Fed holds on October 28th before hiking in December. Chair Warsh’s fireside chat with the IMF’s Georgieva in Bangkok this morning offered little new, with Warsh declining to prejudge meetings while praising a “synchronous tightening” globally. With import prices and industrial production the only data today, Middle East headlines should dominate, and with Iran stepping up attacks on Hormuz shipping and Houthi strikes reaching Aden and Riyadh, we continue to think dollar dips will prove shallow.

EUR

EURUSD extended its rebound yesterday, eventually stabilising above 1.12. Still, that recovery owes everything to US yields and nothing to the eurozone, where August industrial production fell 1.1% YoY against a -0.1% consensus, a reminder of the damage that energy costs are inflicting on European manufacturing with Hormuz flows still impaired. French risk remains the key domestic story. The 10Y OAT-Bund spread sits in the mid-to-high 130s, off its early-October highs, but the finance committee’s rejection of the revenue package points to a fraught first Assembly vote on Monday. Today’s calendar is thin, with final September HICP at 10:00 BST expected to confirm headline inflation at 3.8% and core at 2.5%, while Nagel speaks in Bangkok. We expect the ECB to hold at 2.50% on 29 October, leaving the euro beholden to the dollar and to Paris. We still see 1.11 as the key downside marker and would look to fade rallies while French fiscal uncertainty and the Gulf conflict persist.

GBP

Sterling was a quiet outperformer on Thursday after a rough start to the day. August GDP rose 0.1% MoM against expectations for a 0.1% contraction, with a 0.8% jump in industrial production offsetting flat services and a fourth straight decline in construction. The beat helped cable recover from Wednesday’s sharp pullback, trading back toward 1.33 overnight. Governor Bailey’s appearance in Bangkok overnight added marginally to the move, describing above-target inflation as “enormously frustrating”, while noting that second-round effects from the energy shock remain subdued so far. That keeps the market’s near-certain pricing of a 25bp hike to 4.00% on November 5th intact without encouraging bets on a faster pace. Cable is back on the front foot this morning, and with no UK data today the pound will trade off the dollar, though we would still look to fade sterling strength here. Ten-year gilts above 5.4%, Bailey’s own observation that Middle East news is the biggest driver of UK yields, and the October Budget all argue for a bearish bias into month-end, with next week’s labour market and CPI releases the next major domestic hurdles.

CAD

The loonie had a strong Thursday, with USDCAD falling to test 1.42, where it has consolidated overnight. The move was a dollar story first, but oil did its bit. WTI climbed 2.2% to just under $98 as Iran stepped up attacks on Hormuz shipping and the IRGC claimed a container vessel had been sunk by a mine, offsetting a report that Washington is weighing easing sanctions on shadow-fleet tankers to cut record freight rates. Domestic data helped at the margin too, with August manufacturing sales up 1.5% against a 1.1% consensus, while Governor Macklem’s IMF panel in Bangkok this morning was more notable than we had expected. His comment that the Bank has been looking through higher energy prices “but the longer this goes, the harder that gets” is a hawkish shift from last month, even if he framed it by noting Canada “hasn’t raised rates yet”. Regardless, we still expect a hold at 2.25% on October 28th given two consecutive monthly job losses and US tariff headwinds, but Monday’s September CPI now carries more weight. Deputy Governor Alexopoulos speaks at 13:00 BST, though we doubt she adds much to the debate at this point. In our view, medium-term risks remain skewed towards 1.43 on BoC disappointment later in the month.

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