The dollar stabilises in the absence of domestic catalysts
The dollar stabilised after its first weekly loss since early September as Fed expectations remained largely unchanged. Sterling gained on stronger-than-expected UK labour data, while the euro stayed under pressure amid unrest in France.
USD
The dollar’s first weekly loss since early September did not extend into Monday. Having dipped in early European trade, the DXY closed around 102.0, up roughly 0.2pp as the AI-led equity selloff behind last week’s flight to safety partially reversed, with the Nasdaq rebounding more than 1%. That said, Fed expectations remain little changed: an October hold is priced at close to 85%, with a December hike fully embedded in swaps, consistent with our view that Chair Warsh keeps his powder dry next week before moving ahead of the Christmas holidays. Today’s US calendar offers only September housing starts and building permits at 13:30 BST, and with the FOMC in blackout, broad market direction should again come from elsewhere. Middle East uncertainty should remain dollar supportive for the time being, while cable is likely to be a focus after UK labour market data beat expectations earlier this morning.
EUR
The euro managed to stabilise yesterday, despite protests in France, which tipped into the worst street violence in France for years, prompting partial curfews in Paris, Lille and Lyon and a televised address from President Macron. Granted, EURUSD gapped lower at the open, trading in the 1.11s early before consolidating in the low 1.12s. The damage was more visible in bonds, however, where the 10-year OAT-Bund spread widened to near 150bps, a level last seen during the 2011-12 debt crisis, while the euro briefly hit a fresh 17-month low against sterling. Today, October ZEW expectations at 10:00 BST should be the main domestic event, albeit with one eye also on Moody’s review of France’s sovereign rating, due Friday. With that in mind, we continue to favour fading euro rallies near term, with 1.11 the key downside level.
GBP
Sterling slipped against the dollar on Monday, cable falling around 0.2% to close near 1.33. That has more than fully reversed already today, after this morning’s labour market release managed to exceed expectations by a distance. The unemployment rate fell to 4.7%, down from 4.9% in August, with a single-month print of 4.2% all but guaranteeing that the headline rate will decline over coming releases, taking it further from the BoE’s 4.75% estimate of neutral. Accompanying this, regular earnings nudged a tenth higher to 3.7% 3m/YoY, as did private sector pay, which grew by 3.0% 3m/YoY once excluding bonuses. September payrolls, meanwhile, were estimated to have risen 13k, in contrast to predictions of a -8k decline. That mix should be hawkish for the BoE, and sterling supportive at the margin too – albeit with a November rate hike already close to fully priced, the limited scope to accelerate tightening expectations will help to contain upside. Looking ahead, Megan Greene speaks this evening, having argued policy is “not that restrictive” and is likely to double down after this morning's numbers. CPI tomorrow is the next major sterling test.
CAD
The loonie was among Monday’s best-performing majors, with USDCAD ending the session around 1.41, down a further 0.3%, despite a Canadian CPI release that in our view argued for the opposite. Headline inflation rose to 3.1% in September, a tenth short of consensus, while the core-median and trim measures eased to 1.9% and 1.8% respectively. With gasoline up 27.8% on the year as Hormuz disruption and Houthi attacks keep crude above $100, inflation ex-gasoline actually slowed to 2.2%. Admittedly, the Business Outlook Survey also offered the hawks something, with five-year inflation expectations jumping to 3.91% from 3.39% even as recession fears receded. Still, we continue to expect a hold at 2.25% given two consecutive monthly job losses and US trade headwinds, posing downside risks to the loonie as the month wears on.