USD
The dollar’s climb continued on Wednesday, with the DXY index gaining another 0.3%. Even so, yesterday afternoon saw the greenback appear to hit a ceiling, not unsurprisingly we think, given our growing scepticism over how far election risks can propel the dollar higher ahead of polling day on November 5th. Today, initial jobless claims and S&P PMI readings are the main upcoming data points of note. That said, neither should prove significant market moving, barring a major surprise. All in all, this should leave the broad dollar treading water for now, with the next major catalysts for the greenback coming up next week, with Q3 GDP and NFPs scheduled.
EUR
PMIs should be the focus for euro traders today, albeit not likely to deliver good news. Seasonal adjustments should mean a depressed reading, with a print sub-50 likely, indicating that eurozone private sector activity contracted in October. This is significant given that several ECB speakers, including President Lagarde, have explicitly tied the ECB’s easing path to the evolution of data over recent days. Specifically, the idea of cutting by 50bps seems to be gaining traction amongst ECB doves, and a soft PMI reading would be a notable piece of evidence favouring this point of view. If we are right, then a soft print should see ECB easing bets accelerate this morning, weighing on EURUSD which continues to plumb depths below 1.08.
GBP
Sterling edged lower through the second half of yesterday’s session, helped by comments from BoE Governor Bailey overnight, which we are inclined to think leaned dovish at the margin. Even so, with a November rate cut fully priced, and a budget just around the corner, there has been little room for Bank Rate expectations to retreat, as we had expected. In fact, sterling now scans as cheap in our view. Today’s PMIs should show a decent expansion in private sector activity in October, while we think it would be difficult for next week’s budget to underwhelm when considering the string of negative headlines seen over the past month. This point was underscored this morning by an article in the Guardian newspaper suggesting that the Treasury will tweak the fiscal rules to open up additional headroom. The prospect of more government spending has put the pound on the front foot so far today, and we can see building upside risks for sterling heading into month end. While the dollar’s run higher has likely put our 1.33 October target for cable out of range, we still think 1.31 for GBPUSD and 1.21 for GBPEUR look achievable, considering the upcoming events.
CAD
As expected, the BoC was the main event on Wednesday. The Governing Council cut rates by 50bps, accelerating the pace of easing to match our pre-decision call. Yet despite this, USDCAD is trading stronger this morning than immediately before the policy announcement. To us, this price action is at odds with the details of yesterday’s rate decision. The Bank presented a set of forecasts that looked optimistic in our eyes, and then conditioned the future path for rates on data evolving in line with those expectations. We see significant risks that both growth and inflation will undershoot these projections. Indeed, this has broadly been the pattern for much of the past 12 months. If we are right, then it seems likely the Governing Council will find themselves delivering another 50bp cut in December. So, while the lack of a clear steer in this direction from Governor Macklem, combined with a relatively benign set of forecasts, has been sufficient to support the loonie for now, monetary policy expectations should see CAD underperform heading into the end of the year.
