The dollar in the doldrums pre-CPI
The dollar ended last week much as we had expected, with Friday’s dip proving shallow, as Governor Waller’s earlier reminder that the Fed need not hike at every meeting was offset by a Michigan survey that did little to ease inflation concerns.
USD
The dollar ended last week much as we had expected, with Friday’s dip proving shallow, as Governor Waller’s earlier reminder that the Fed need not hike at every meeting was offset by a Michigan survey that did little to ease inflation concerns. Headline sentiment slumped to 46.3 against the 47.6 consensus, but one-year inflation expectations rose to 4.7%, keeping a December hike close to fully priced and the 10-year Treasury yield just below 5.25%. Meanwhile, the weekend brought a fresh escalation in the Middle East: Houthi strikes on Riyadh’s airport on Saturday killed at least 12, reportedly including a US citizen, and Iran’s Supreme National Security Council called Washington’s reply to its seven conditions for reopening Hormuz “insufficient”. With President Trump’s pledge of no strikes on Iran before the midterms still standing for now, the dollar has opened this morning marginally softer. Today, cash Treasuries are closed for Columbus Day, which should keep ranges tight ahead of Wednesday’s CPI. We expect an in-line print, meaning dips over coming days should remain limited.
EUR
EURUSD stabilised just above 1.12 on Friday, although as we flagged last week, this recovery owes more to Iran strike delays and softer Treasury yields than to any eurozone improvement. That theme remains true again this morning, with the euro is marginally firmer on a softer dollar, even as renewed Gulf attacks give pause for thought. The domestic backdrop is no easier: the National Assembly begins debating the 2027 budget tomorrow, with the first vote on the revenue side due on October 20th and the left already promising to back censure, leaving the outcome in the hands of the National Rally. That aside, there is no top tier eurozone data today, with the calendar light for much of the week. As such, our base case remains that an in-line US inflation print could open the door for French worries to ease down the line, but we see little reason to chase euro strength before then – we will be reassessing post-US CPI.
GBP
Sterling held its ground on Friday, again in spite of domestic conditions. Beneath the surface, the fiscal narrative we have been warning about is building, and with the October Budget now only two weeks away, we are starting to see increased commentary on the economic challenges facing the government. That, we think, continues to prove a headwind for sterling over coming fortnight. Accompanying this today, the BoE’s Breeden and Mann are due to speak, with a raft of follow up MPC commentary due throughout the course of the week – likely to be a focus alongside fiscal policy given there is no meaningful UK data due until Thursday’s August GDP. We continue to expect traders to refocus on the Budget as the week progresses, weighing on the pound, particularly against a euro that may stabilise if US CPI prints in line.
CAD
The loonie was the standout underperformer on Friday, as we had warned. September’s Labour Force Survey showed a 68k drop in employment against expectations for a small rebound, following August’s 42k fall, with the unemployment rate rising just 0.1pp to 6.5% only because participation slid to 64.8%, its lowest outside the pandemic since 1997. In our view, this second consecutive jobs miss should settle the Bank of Canada’s October debate in favour of holding at 2.25% - albeit, markets still ascribe a one-in-four chance that the Bank now tightens rates this month. Still, we think that backdrop keeps USDCAD biased toward 1.43 in the medium term, with the pair likely to consolidate before Wednesday’s US CPI, and with Canadian markets are closed for Thanksgiving today.