The US dollar has continued its strong rebound against major currencies for the fourth week in a row. Two key factors are driving this rally.
First, there’s been a shift in expectations around the Federal Reserve’s policy outlook. Initially, markets were pricing in the possibility of 75 basis points in rate cuts before year-end. However, that’s now been dialled back to around 50 basis points as economic data has remained relatively solid. However, this narrative may be tested soon, as the upcoming jobs report is expected to slow employment growth. Still, the data might be skewed by recent storms and strikes, making it less straightforward.
The second factor boosting the dollar is the view among some large investors that despite political preferences for a weaker dollar, election outcomes favouring Trump or Vance could ultimately strengthen the currency. This would happen through the interest rate channel, alongside pressure on US trading partners due to potential tariff increases.
The next two weeks are poised to bring significant developments. Key events include Japan’s election on October 27, the UK’s budget announcement with possible public investment initiatives, a Bank of Japan meeting, preliminary eurozone inflation data for October (which is expected to edge higher), and crucial US employment figures that could reveal a sharp drop in job growth after September’s 254,000 gain. The US Treasury will also announce plans to issue more than $600 billion in bills and bonds. Although recent rate hikes have accounted for some of this, a weak jobs report could signal a peak in interest rates.
This confluence of events sets the stage for potential volatility in the markets.
U.S.A
Upcoming High-Frequency US Data
In the week ahead, there’s a significant US economic data release each day, with the most crucial being the October employment report. US interest rates seemed to find a bottom after the Federal Reserve’s 50-basis-point rate cut, but the stronger-than-expected September jobs report spurred a notable reaction in rates and the dollar. Despite the Fed’s projections for two quarter-point cuts in Q4, markets were still factoring in 75 basis points of cuts even ten days after the FOMC meeting. The risk now is that September’s employment surge may have been an outlier, and the broader trend shows a slowdown in job growth.
Signs of Slowing Job Growth
Job growth appears to be tapering off. In the three months leading up to August, nonfarm payrolls increased by an average of just 140,000 jobs per month, marking the slowest pace since the first half of 2020. Meanwhile, the unemployment rate climbed from 3.7% in January to 4.3% in July, before edging down to 4.2% in August. The median forecast for October’s nonfarm payrolls suggests an increase of 108,000, but this figure could be on the lower end due to the impact of industrial disruptions and adverse weather.
Limited Manufacturing Employment Growth
The revival in the US manufacturing sector has not translated into job gains. Through August, manufacturing employment fell by 40,000 this year, with fewer than 10,000 jobs added in the first eight months of 2023. This indicates a disconnect between sectoral growth and employment trends, reflecting broader challenges in manufacturing.
GDP Growth Expectations for Q3
Ahead of the employment report, the US will release its initial estimate for Q3 GDP on October 30. The forecast has been steadily adjusted upward, now standing at 3.0%, matching Q2’s growth. The Atlanta Fed’s tracker predicts a slightly higher rate of 3.4%. This GDP figure will factor in the latest data on September’s income and consumption, both expected to rise by 0.4% following 0.2% gains in August.
Inflation Measures in Focus
The PCE deflator figures, set to be released soon, will offer insight into inflation trends. Economists anticipate a 0.2% increase in the headline PCE deflator, potentially lowering the year-over-year rate to 2.1%, its lowest since early 2021. Despite media emphasis on the core rate, the Federal Reserve’s targeted measure remains the headline PCE deflator. Neither Fed Chair Powell nor Governor Waller referenced the core measure when justifying the recent 50-basis-point rate cut, instead pointing to the CPI data.
Dollar Index Nearing Resistance Levels
The Dollar Index climbed for the fourth straight week, equaling its longest rally since February. It reached a peak above 104.55 last week before stabilizing. The next key resistance lies in the 104.80-105.00 range, while support is around 103.40-103.80. A break below this support could signal a downturn in momentum. Despite Trump’s calls for a more competitive currency, expectations of a stronger dollar following a potential Trump victory continue to influence the market.
Key Points:
- US economic data will be closely monitored this week, with a focus on the October jobs report.
- Job growth is slowing, with unemployment inching higher and manufacturing employment stagnating.
- Q3 GDP is projected to match Q2’s 3.0% growth, with inflation measures suggesting a cooling trend.
- The Dollar Index is testing key resistance levels amid ongoing speculation about the impact of US political outcomes.
Australia
RBA Meeting Approaches Amid CPI Release
The Reserve Bank of Australia (RBA) is set to meet on November 5, but the upcoming quarterly CPI report on October 30 is unlikely to significantly influence its decision. If inflation drops below 3% from the 3.9% recorded in Q2, consistent with the recent monthly trend, markets may anticipate an earlier rate cut. Currently, the market is not fully pricing in a rate cut until April next year. The RBA remains concerned about demand outpacing supply, though indicators like inflation-adjusted retail sales and overall household spending suggest demand may be softening.
Australian Dollar Trends Lower
The Australian dollar has experienced a four-week decline, ending last week at $0.6600 after peaking above $0.6940 in late September. The currency tested the 200-day moving average (around $0.6630) several times last week but ultimately closed below it. This marked a new low since mid-August, indicating further downside potential. The next significant support level lies around $0.6575, while a move above $0.6660 is needed to improve the outlook.
Key Points:
- RBA’s rate decision on November 5 is unlikely to be swayed by the upcoming CPI release.
- Markets could anticipate an earlier rate cut if inflation drops below 3%.
- The Australian dollar’s recent decline signals the potential for further losses unless it rebounds above key resistance levels.
Canada
Bank of Canada’s Aggressive Rate Cuts
Following last week’s 50-basis-point rate cut, the Bank of Canada has established itself as the most aggressive central bank, slashing rates by a total of 125 basis points since June. The central bank’s easing cycle may not be over, as the swaps market currently shows more than a one-in-three chance of another 50-basis-point cut in December. However, there is a risk that the market may be overly optimistic. While the headline inflation rate has fallen to 1.6%, core inflation remains between 2.3% and 2.4%. Meanwhile, the Canadian economy is growing modestly, with monthly GDP averaging a 0.2% increase over the first seven months of the year, compared to 0.1% during the same period in 2023.
Rising Political Uncertainty in Canada
Political risks are intensifying as the month draws to a close. The minority Liberal government may face a no-confidence vote, as the Bloc Quebecois has threatened to withdraw its support. The Conservatives have already indicated they would back the motion, but success would also require support from the Bloc Quebecois and the New Democratic Party.
Canadian Dollar Under Pressure
The Canadian dollar has continued to weaken, falling nearly 2.7% during a four-week slide. The US dollar reached its highest close since August 2 last week. In a strong US dollar environment, the Canadian dollar usually fares better on cross-pairings, and this month it has been the second-best performer among G10 currencies, just behind the Swiss franc (approximately -2.4%). However, there seems to be little standing in the way of a test of the year’s high near CAD1.3945 and the late 2022 high around CAD1.3975. The last time the US dollar traded above CAD1.40 was in the early stages of the pandemic. Support is currently seen near CAD1.38.
Key Points:
- The Bank of Canada has cut rates aggressively, with a potential for further easing in December.
- Political uncertainty could heighten as a no-confidence vote looms over the minority government.
- The Canadian dollar remains under pressure, with a test of key resistance levels likely in the coming weeks.
China
Upcoming PMI Releases in China
China will release its October PMI data on October 31, followed by the Caixin manufacturing PMI on November 1. It may still be too soon to observe significant effects from recent initiatives aimed at supporting the property market, stock market, and efforts to manage local government debt risks.
Yuan’s Performance Against the Dollar
The US dollar rose slightly against the offshore yuan last week, gaining about 0.15%, while remaining within a narrow trading range of CNH7.10 to CNH7.15. The yuan’s correlation with the yen has weakened recently, as specific domestic factors have had a stronger influence. Similar to other currencies, the yuan experienced some weakness in October after strengthening in August and September. If the dollar declines against G7 currencies, it is likely to retreat against the yuan as well.
Yuan’s Relative Strength in 2024
Despite being flat against the dollar this year, the yuan has appreciated over 7% against the Japanese yen. The only G10 currency it hasn’t outperformed is the British pound.
Key Points:
- China’s PMI data may not yet reflect the effects of recent economic support measures.
- The yuan remains in a narrow trading range, with potential for further movement if the dollar weakens.
- The yuan has shown relative strength against most major Asian currencies in 2024, except for sterling.
Europe
Eurozone’s Stagnant Growth Outlook
The euro area is experiencing limited economic momentum. The regional economy expanded by approximately 0.5% in the first half of the year, with projections for just 0.2% growth in both Q3 and Q4. Economists anticipate an uptick in growth next year. The European Central Bank (ECB) and the International Monetary Fund (IMF) have slightly different forecasts, with the ECB expecting 0.8% growth in 2024 and 1.3% in 2025, while the IMF projects 0.9% this year and 1.5% next year. Germany, the largest economy in the region, has struggled to achieve two consecutive quarters of growth since late 2021 and early 2022. Former ECB President Mario Draghi recently highlighted the EU’s dilemma, presenting three options: integration, exit, or stagnation. Currently, stagnation seems to be the default choice.
Upcoming Eurozone CPI Data
The preliminary estimate for the eurozone’s October CPI is set for release on October 31. Inflation remained flat in Q3, with a year-over-year rate of 1.8% in September—the lowest since April 2021. There is a risk that inflation could rise in October and November due to base effects, as CPI increased by 0.1% in October 2023 but fell by 0.6% in November. Speculation has emerged about a potential 50-basis-point rate cut by the ECB in December, although the swaps market only prices in a 40% chance of this happening, which may be an overestimate.
Euro’s Struggle to Gain Ground
The euro has been under pressure for five consecutive weeks, hitting a low near $1.0760 last week before recovering to $1.0840. However, it has struggled to maintain upward momentum, falling back below $1.08. The currency’s decline has mirrored the widening of the US-German two-year yield spread, which grew from about 135 basis points in mid-September to over 200 basis points last week. The first narrowing of this spread in nine sessions occurred just before the weekend, a necessary development if the euro is to establish a bottom.
Key Points:
- Eurozone growth remains sluggish, with limited near-term prospects for acceleration.
- October CPI data may indicate a rise in inflation due to challenging base comparisons.
- The euro’s weakness reflects a widening US-German yield spread, which needs to narrow for the currency to stabilize.
Japan
Upcoming Japanese Election and Policy Expectations
Japan’s election for the lower chamber of the Diet is set for October 27. Recent polls suggest that the ruling Liberal Democratic Party (LDP) may lose its outright majority for the first time since 2009. However, with its coalition partner Komeito, the governing coalition is still expected to remain in power. Even if the LDP falls short of a majority, substantial policy changes are unlikely. Prime Minister Ishiba is preparing a new support package aimed at mitigating the impact of rising prices, which could include extended household energy subsidies and cash transfers to low-income households. The package may be worth around JPY17 trillion (approximately $100 billion).
Bank of Japan Meeting and Market Expectations
The Bank of Japan’s meeting concludes on October 31, with minimal expectations for an immediate policy change. The market is currently pricing around nine basis points of tightening for the December meeting, with a 15 basis point hike anticipated by the end of January and a 25 basis point increase expected by mid-2025. The central bank will also update its economic forecasts. In July, it projected 1% growth for this fiscal year and the next, with core CPI expected to be 2.5% for this year (it was at 2.4% in September), easing to 2.1% in the next fiscal year and 1.9% in the fiscal year 2026.
Yen’s Decline Amid Rising US Yields
The continued rise in US 10-year yields has fueled the dollar’s rally against the yen, pushing it to JPY153.20 last week as the 10-year yield peaked above 4.25%. Japanese officials have been notably quiet during the dollar’s four-week streak against the yen. The JPY153.40 level corresponds to a key retracement point (61.8%) of the dollar’s decline from the high near JPY162 in early July to the mid-September low around JPY139.60. Breaking above this level could lead to further gains, potentially reaching JPY155 as markets test officials’ tolerance. Initial support near JPY151.40 was held before the weekend, but a break below JPY151 would be significant from a technical standpoint.
Key Points:
- Japan’s election may see the LDP lose its outright majority, but major policy shifts are unlikely.
- The BOJ is not expected to change policy immediately, but tightening may begin by early 2025.
- Rising US yields are driving the dollar higher against the yen, with key levels around JPY153.40 and JPY155 being closely watched.
U.K.
UK Autumn Budget and Economic Outlook
The upcoming Autumn budget on October 30 is likely to overshadow other economic reports, such as mortgage and consumer credit data, which rarely influence markets. Chancellor Reeves aims to address the GBP22 billion deficit inherited from the previous government, potentially justifying tax increases within the first 100 days in office. Unlike her predecessor’s approach of projecting post-election spending cuts to fund tax relief, Reeves plans to use the Public Sector Net Financial Liabilities metric to create fiscal space, estimated at GBP50 billion. While this offers room for policy manoeuvring, it’s unlikely to all be used immediately.
However, the prevailing doom-and-gloom narrative has dented consumer confidence and created anxiety among investors and businesses about potential tax increases. Despite Prime Minister Starmer’s campaign pledge to “relight the fire of optimism,” such optimism remains elusive.
Bank of England’s Rate Cut Speculation
The market anticipates the Bank of England’s second rate cut in this easing cycle on November 7. The probability of another cut in December has dropped to around 65% from over 75% a week ago, as reflected in the swaps market. The recent economic environment has made further rate cuts less certain as policymakers navigate the balancing act between stimulating growth and managing inflation.
Sterling’s Decline and Key Levels
The British pound has experienced a four-week decline, its longest stretch this year. After peaking in late September at around $1.3435, it fell to nearly $1.29 last week. Although it briefly recovered to $1.30, the momentum faded, with sterling settling near session lows. The currency now appears likely to retest $1.2900, with a break below this level potentially paving the way for further declines, possibly to $1.2800.
Key Points:
- Autumn Budget (Oct 30): Chancellor Reeves targets a £22B deficit with potential tax hikes, using £50B fiscal space but deploying it cautiously.
- Economic Sentiment: Low consumer confidence and investor anxiety overshadow PM Starmer’s optimism pledge.
- Bank of England Rate Cuts: The second cut is expected on Nov 7; December probability drops to 65% amid inflation-growth balancing challenges.
- Sterling Decline: GBP fell for four weeks, with $1.2900 as key support; a break could lead to $1.2800.