The dollar stalls ahead of FOMC minutes
The dollar’s rebound paused as improving risk sentiment and lower energy prices weighed on the DXY, with markets turning to the September FOMC minutes for clues on the Fed’s tightening outlook.
USD
The dollar's resurgence stalled on Tuesday as risk appetite improved and energy prices retreated, with the DXY index closing a quarter of a percent lower, its largest daily drop since late September. The S&P 500 climbed 0.6% to a fresh record, and 10-year Treasury yields eased at the margin, while a wider-than-expected $105.6bn August trade deficit was ignored. Fed speakers offered little new, leaving markets to price a roughly one-in-five chance of a hike this month, and around 85% odds of a move by year-end, consistent with our view after Friday's soft payrolls, that the next hike comes in December. The pullback proved shallow, however, with the index back above 102.00 overnight after renewed Iranian strikes revived safe-haven demand and lifted yields. Middle East worries aside, today's focus is September FOMC minutes at 19:00 BST. With the committee's tightening guidance now sitting uneasily alongside recent jobs data, any sign of broad discomfort with further tightening would weigh on the greenback.
EUR
The euro posted its best day in over a month on Tuesday, recovering to trade in the mid-1.12s as French bonds staged a recovery. Marine Le Pen's pledge to bring the deficit below 3% of GDP by 2032 reassured investors, taking 10-year OAT yields below 4.8% temporarily, while narrowing the spread over Bunds. That said, data were less encouraging from a euro perspective, with German factory orders collapsing 10.6% in August and eurozone retail sales growth of 0.8% missing expectations. Married to that, developments in the Middle East overnight are seeing bonds under pressure again this morning, with OATs struggling relative to peers. As such, we continue to see the recent euro bounce as a relief rally to be sold, with 1.11 remaining our next downside marker. Today brings ECB speakers Cipollone and Vujčić, ahead of tomorrow's ECB meeting accounts, though we suspect Middle East concerns and French politics will remain the primary euro drivers.
GBP
Sterling was among the better performers on Tuesday, with cable touching a one-week high near 1.33 as the dollar softened, while EURGBP stabilised. The move extended the pound’s early-week resilience, continuing to draw support from the BoE's near-term hawkish lean relative to the ECB and Fed. MPC member Catherine Mann added to that on Tuesday, warning that supply shocks are embedding inflation in the UK economy and that headline inflation could reach 4% around year-end, just as wage negotiations get underway, reiterating her case for a hike next month. Yet the fiscal backdrop remains sterling’s key vulnerability, with gilts still trading poorly after long yields breached 6% last week, and with risk premium around the 28 October Budget underpriced in our view. Given that, and with the UK calendar light today, we expect cable to struggle to extend much above 1.33.
CAD
The loonie outperformed on Tuesday, with USDCAD falling as oil reversed higher and the dollar faded. Canada's August trade surplus widened to C$4.2bn, a four-year high and well above the C$1.55bn consensus, as exports rose 2.5% on a 17.4% jump in refined petroleum shipments. The Ivey PMI cooled to 58.2 from 64.3, but its prices index rose to 82.8, underscoring the inflation pressure facing the Bank of Canada. Crude, however, was the main driver of loonie upside, with WTI rising on renewed US-Iran concerns. All told, USDCAD now sits just above 1.42 this morning, within the 1.41-1.43 range we expect to hold ahead of Friday's September jobs report, where consensus looks for a modest employment rebound and a rise in unemployment to 6.5%. Before then, with no domestic data today, oil headlines and the Fed minutes are in control for the pair.