The dollar climbs ahead of a busy day for markets
The dollar advanced ahead of the FOMC decision as strong US consumer confidence reinforced support, while EURUSD and GBPUSD faced downside risks from domestic and policy uncertainty.
USD
The dollar extended its pre-FOMC advance yesterday, with the DXY rising 0.4% to around 102.4, consistent with our view that the greenback would hold its gains into today’s decision. The catalyst was a striking Conference Board consumer confidence print of 91.7 against an expected 81.0, while durable goods orders rose 1.8%, albeit flattered by aircraft. Today’s FOMC at 18:00 GMT should see rates held at 3.75-4.00%, with only around 10% odds of a hike priced. The focus will be on whether Chair Warsh endorses the roughly 90% probability markets attach to a December hike, and whether the July hawkish dissents are repeated. We think a hawkish hold keeps the dollar supported into the midterms, and any potential Middle East escalation.
EUR
A stronger buck saw EURUSD slip 0.4% on Tuesday, tracking our preference for euro downside and bringing 1.11 into view. Beyond dollar strength, the euro continues to be held back by domestic softness, with French consumer confidence falling to a 13-year low, an ECB lending survey showing tighter credit conditions in Q3, and a profit warning from Mercedes-Benz. Indeed, the eurozone remains highly exposed to the energy shock from the Iran conflict, so the Israeli election deadlock, with exit polls showing the Netanyahu and Eisenkot blocs level prolonging that uncertainty. With no top-tier eurozone data today, the pair will trade on the Fed and Middle East headlines. Tomorrow’s ECB meeting at 13:15 GMT should deliver a hold at a 2.50% deposit rate, with only around 20bp of further tightening priced by year-end and France likely to dominate the press conference. We continue to favour near-term euro downside.
GBP
The pound softened ahead of the Budget, with GBPUSD testing 1.33 overnight, though this owed more to dollar strength than sterling downside. Looking ahead, Chancellor Healey delivers his first Budget at around 12:30 GMT. Our base case remains a low-key Budget that rebuilds headroom to roughly £15bn, keeps headline tax rates untouched and defers major spending decisions to 2027. With consensus already supportive for gilts, the asymmetry lies in disappointment: credibility concerns over deferred spending choices could well see sterling downside pressure build, while a disciplined package is largely priced and would offer only modest relief. With the FOMC also capable of overriding the Budget reaction, we see GBPUSD risks skewed lower into month-end.
CAD
USDCAD rose 0.3% on Wednesday, with the loonie extending its pullback after last week’s temporary break below 1.40. Underpinning this, WTI settled below $100 on hopes from the Tehran talks, but progress towards easing US tariffs on Canadian steel and autos offered some offset. Arguably more important for loonie fortunes, however, the Bank of Canada delivers a rate announcement at 13:45 GMT, with a fresh Monetary Policy Report and Governor Macklem’s press conference following. Markets price in a roughly 80% chance of a 25bp hike to 2.50%, after September inflation rose to 3.1% YoY, the Business Outlook Survey showed rising inflation expectations, and hawkish comments from Macklem. Economists are more split, and we continue to think a hold at 2.25% with hawkish guidance is more likely given soft underlying inflation and signs of labour market weakness, which would disappoint pricing and push USDCAD back towards 1.42, particularly if the Fed also sounds hawkish later in the day.