The dollar eases with few catalysts of note due

USD

The dollar slipped back on Tuesday with the DXY closing 0.2% lower just below 101.8 as Treasury yields eased, the 10-year dipping back towards 5.1%, and oil retreated from five-month highs on unconfirmed reports of progress in US-Iran talks that were later denied. Data did the greenback few favours either, with housing starts down 5.2% in September and pending home sales plunging 7.3% to a record low as 7.4% mortgage rates bite. None of this changes the Fed picture, in our view: an October hold is priced at around 80% and a December hike remains near fully discounted after last week’s CPI print. Today’s US calendar is empty, leaving the dollar to trade on crosses, tech earnings after the close, and the Middle East. Overnight, Iran rejected the US-backed proposals, insisting its conditions for reopening the Strait of Hormuz be met, while reports suggest President Trump is weighing renewed strikes. With Brent back near $110, we continue to think haven demand limits dollar downside.

EUR

The euro remained a laggard yesterday, barely participating in the broader dollar pullback. EURUSD finished little changed, trading just above 1.12 as domestic risks continued to weigh. Indeed, French risk premia show no sign of easing: 10-year OAT yields sit near 4.95%, and the spread over Bunds is now above 150bps. The government is also deploying troops to reinforce police ahead of further protests on Saturday. All of this keeps the euro at a 17-month low against sterling near 0.84. The eurozone calendar is empty again today, so French bonds and Hormuz headlines will set the tone ahead of flash PMIs and Moody’s review of France’s Aa3 rating on Friday, and the ECB next Thursday. We retain our preference for near-term downside until French fiscal concerns subside.

GBP

Sterling was among the best-performing majors yesterday, with cable rising around 0.4% to the high 1.33s. The move followed a stronger-than-expected labour market report, with unemployment falling to 4.7% against expectations for 4.9%, regular pay growth up to 3.7%, and September payrolls rising 13k rather than falling. Megan Greene added fuel in the evening, warning that the policy stance is “not restrictive enough”. This morning’s CPI release reinforced the hawkish case, though without offering meaningful sterling support. Headline inflation rose to 3.5% in September, above both the 3.4% consensus and our own expectation of a softer outturn, with core up to 2.8% and services accelerating to 3.7% from 3.4%. Motor fuel inflation of nearly 30%, a direct consequence of the Iran war, did much of the work. But with a November hike to 4.00% already fully priced, the scope for accelerated tightening expectations is limited from here, capping sterling gains. Governor Bailey speaks at 14:00 BST, with retail sales on Friday and the Budget next week all to navigate before month end.

CAD

The loonie was also a standout performer on Tuesday, with USDCAD falling 0.5% to the mid-1.40s, its lowest since September 22nd. Alberta’s referendum, where 76% voted to remain in Canada, removed a tail risk, handing Prime Minister Carney a welcome political win. That compounded Macklem’s hawkish weekend comments and Monday’s rise in inflation expectations, with swaps now pricing roughly 80% odds of a hike to 2.50% on October 28th. That said, we remain unconvinced. As we argued after Monday’s CPI report, headline inflation of 3.1% undershot consensus and the average of the Bank’s preferred core measures fell to 1.85%, a new low for the year, while two consecutive monthly job losses argue against tightening. Macklem himself has said that absent the Middle East shock, the Bank would be discussing cuts. We therefore still expect a hold next week and think pricing will be pared back, leaving the loonie vulnerable. With no Canadian data today, oil and Hormuz headlines will dominate, and we continue to see USDCAD drifting back toward 1.43 over the coming weeks, underpinned by our off-consensus call for the BoC.

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