Written by Convera’s Market Insights team
Dollar pauses near 3-month high
George Vessey – Lead FX Strategist
The Federal Reserve’s (Fed) Beige Book once again painted a picture of a sluggish US economy that is seemingly at odds with the official data, however it hasn’t had much of a market impact. Instead, a multitude of bullish factors are driving the US dollar higher. The resurrection of the US exceptionalism narrative. The rise in fixed income volatility with US yields surging to 3-month highs. Plus, geopolitics and domestic politics are giving the dollar another layer of support, especially given the improved polling for Donald Trump in the upcoming US election.
Beyond the return of US economic exceptionalism driving the dollar and yields higher, the market remains convinced that the Republicans are on course to win the election. In this scenario, an increase in tariffs is likely to be dollar positive via the risk-sentiment and trade slowdown channel. If it turns out to be significantly inflationary and impacts the Fed’s bias to ease policy, it would be additionally beneficial for the dollar via the monetary policy channel. In the FX space, traders are preparing for such a scenario, with two-week implied volatility in EUR/USD, that now captures the US election aftermath for the first time, recording its second biggest daily jump since the Covid-19 pandemic broke out in 2020.
Elsewhere in North America, the Bank of Canada (BoC) joined the jumbo camp with a 50 basis point interest rate cut yesterday. The spread between US and Canadian two-year bond yields is now at its widest since 1997. This could continue putting negative pressure on the so-called Loonie, which might be exacerbated by a Republican win in a couple of weeks.
Sterling stumbles over 3% MTD
George Vessey – Lead FX Strategist
The British pound extended below its 100-day moving average yesterday to trade near $1.29, down over 3% month-to-date against the US dollar. Ongoing dollar strength is driving the pair lower, but Bank of England (BoE) Governor Bailey’s dovish comments also weighed on sterling as traders brace for flash PMIs later this morning.
Bailey said disinflation is happening faster than officials had anticipated in a hint the central bank may continue lowering rates next month. Despite the development on inflation and cooling wage growth, traders have been more hesitant on betting the BoE cut rates in both November and December. Although rate expectations haven’t budged too much following Bailey’s comments, and UK gilt yields are climbing higher still, the pro-cyclical pound remains at the mercy of wavering global risk sentiment, falling equities and broad-based dollar strength as traders scale back Fed rate cutting expectations and position for the coin flip US election. The convincing break below the 100-day moving average opens the door to the 200-week moving average at $1.2850 and its 200-day moving average located down at $1.28.
Flash industry PMIs are in the spotlight today and all are seen holding above 50 in the UK, which signals expansion. The employment, new orders and future output expectations balances for the manufacturing sector fell in September likely as Budget uncertainty weighed on sentiment. The services sector has been more robust, in expansion for over a year and driven by rising domestic demand. This underscores the diverging trend between the UK’s activity and the contractionary swing in the Eurozone, which has helped GBP/EUR stay around €1.20.
No FTA spells potential trouble for euro
Boris Kovacevic – Global Macro Strategist
The euro has had to fight a plethora of headwinds over the past four weeks. From disappointing macro data for Germany, inflation falling below target in most Eurozone countries, and increasing bets of further monetary policy easing to political uncertainty surrounding the US election.
However, faltering risk sentiment and falling stock markets have not been on that list. This seems to be changing this week as the S&P 500 is on track to record its first weekly loss in eight and as volatility rates – implied and realized – continue trending higher. This has finally pushed EUR/USD below the mark of $1.08 with $1.0750 coming into play.
The euro is not the only currency suffering from investors positioning for the US election in advance. Still, the lack of a free trade agreement (FTA) between the United States and European Union suggest economic pain ahead under the scenario of a Trump win and increase in tariffs. EUR/USD implied one-month volatility is now the highest since early 2023 at 8.3% and the call option premium for the same tenor suggests investors prefer hedging against further downside vs. upside risks.
Gold, yields and dollar push higher
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 21-25
All times are in BST
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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.
