Written by Convera’s Market Insights team
Dollar slips before Fed minutes – George Vessey – Lead FX Strategist
The US dollar snapped an 11-week winning streak and has started the new week off on the defensive despite the outbreak of hostilities in the Middle East. Safe haven USD demand was short-lived and the plunge in US yields over recent days, helped by dovish Federal Reserve (Fed) comments, has weighed on the world’s reserve currency. Fed meeting minutes are up today along with US producer price inflation ahead of tomorrow’s closely watched CPI.
Fed officials have performed what seems like a communications pivot this week, shifting away from the “higher for longer” narrative that has dominated rhetoric for months and has helped the dollar recover 7% of its 13% fall since its 2022 peak. Two Fed officials have recently stated that the rise in long-term yields might negate the need for further rate hikes, whilst another insisted the central bank does not need to hike again in this cycle. US rate expectations have consequently been scaled back with money markets pricing a mere 20% chance of another 25-basis point hike next month. Meanwhile, a cut in interest rates is now eyed in June from July 2024 and an earlier move is growing more likely with a 45% chance rates are cut in May. Treasury yields have similarly tracked lower following the dovish Fed comments, with the two-year yield, which typically reflects near-term rate expectations, hitting a one-month low and the 10-year slipping further south of the closely watched 5% mark.
Dovish Fed talk and bond demand could ramp up over the month and quarter, which could generate a growing appetite to take on more risk. This will encourage cash to flow away from safer havens like the dollar into riskier assets like stocks but also higher yielding currencies such as South Africa’s rand, the Brazilian real and Mexican peso, to name a few.
Sterling’s recovery could extend higher – George Vessey – Lead FX Strategist
As we expected, the pound has staged a modest recovery from 7-month lows after falling into extreme oversold territory according to GBP/USD’s daily Relative Strength Index. The currency pair is now back in neutral territory, but if it breaks above its 50-week moving average at $1.2350, we could see an acceleration towards $1.2450, around where the 100-week and 200-day moving averages currently reside.
On the data front this week, it’s been a relatively quiet one so far. The British Retail Consortium showed year-over-year growth in total retail sales values fell to 2.7% in September, from 4.1% in August as unusually warm weather temporarily depressed demand for clothing. Meanwhile, a survey from KPMG and the Recruitment and Employment Confederation has this morning revealed that UK starting salaries and pay for temporary workers rose at their slowest pace in two and a half years in September, adding to signs the labour market is cooling and additional Bank of England (BoE) rate hikes are unlikely. However, we’ve also heard from the International Monetary Fund this week, advising the BoE to hike once more in this tightening cycle due to UK inflation proving more persistent than in other countries.
The signals from the BoE are just as inconsistent. Deputy Governor Ben Broadbent and policy committee member Catherine Mann have conflicting views on whether the central bank should hike again. As is the case for most central banks, the data remains important. For currencies, the rate and yield spreads remain critical.
Supported by oil, CAD awaits upcoming US data – Ruta Prieskienyte – FX Strategist
The more than 1% slide of the Greenback against the Canadian dollar that started last Thursday is running out of steam as investors assess how much more upside potential there is for oil prices. USD/CAD corrected sharply to below 1.36 on early Wednesday morning, falling to a 7-day low. The Canadian dollar has been supported by falling rate expectations in the United States and rising oil prices in recent days but could not break below the $1.3570 mark.
Dovish remarks by the Fed’s Logan that there may be “less need for the Fed to raise rates” weighted negatively on the US Dollar. However, today’s bid for the safe haven currency shows that investors are finding it hard to let go of the Greenback for good. Joe Biden’s pledge of military aid and political support for Israel has somewhat eased the market mood with S&P500 posting modest gains on Tuesday. However, the participation of other Middle East countries in the conflict could dampen sentiment and boost demand for the Greenback, pushing the USD/CAD pair back towards the 1.37-1.38 levels. Meanwhile, rising oil prices are strengthening the Canadian Dollar and further tensions are expected to keep oil prices from falling too much.
Going forward, all eyes are on the incoming US PPI data, which could give an indication to the inflationary backdrop in the US, and the FOMC minutes. From the Canadian perspective, building permit data will give the insight into the health of the domestic economy amid a deep housing market crisis.
GBP/USD rallies nearly 2% from lows
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 9-13
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
