USD: Fed holds the line, trade lifts
Section written by: Antonio Ruggiero
The Federal Open Market Committee voted 10–2 to lower the target rate by a quarter point to 3.75–4.00. As anticipated, yesterday’s Fed meeting proved dollar-positive – the dollar index closed 0.5% higher. As we had anticipated, the setup echoed September: a cautious cut, with December still “far from a foregone conclusion”, keeping dollar bid.
The Fed also announced it will halt balance sheet runoff starting December 1, ending a two-year unwind that shaved over $2 trillion from its holdings.
There was acknowledgment of a broadly resilient macro backdrop, with the economy expanding at a moderate pace, underpinned by still-strong consumer spending. Inflation remains somewhat elevated – particularly tariff-driven goods inflation, which has picked up and may prove stickier than expected.
When asked about the drivers of labour market softening, Powell pointed to supply-side shifts as the primary force, citing lower immigration levels tied to Trump’s agenda. This nuanced dynamic helps explain the apparent contradiction with strong consumer spending.
What stood out was the Fed’s growing confidence in alternative data sources to guide decision-making – an essential pivot given the ongoing government shutdown. Rather than lulling in sheer uncertainty and offering no directional impetus, Powell’s remarks grounded the tone, transmitting a deliberate blend of conviction and caution, lending the statement a firmer, more directionally biased edge than markets may have anticipated.
Meanwhile, positive momentum around trade negotiations – coupled with the AI-driven equity rally and Powell’s tone – continues to dull the optics of dysfunction stemming from the shutdown, offering baseline support for the dollar. During the current trip to Asia, President Trump and South Korean President Lee Jae Myung finalized a trade deal, capping months of negotiation over a framework agreement. Under the deal, Seoul will invest $150 billion in shipbuilding, with an additional $200 billion earmarked for broader investment pledges. In return, the US will cap tariffs on South Korean goods at 15%.
Next up: China. The much-anticipated meeting is unfolding at the time of writing, and hopes are high that the two sides will strike a truce – or perhaps something more enduring. For now, only good news: the two parties have reached consensus on cooperation to combat fentanyl-related narcotics, expand agricultural trade, and address TikTok. Meanwhile, the US has extended its suspension of the 24% reciprocal tariff for another year.
We see the 99 handle as more amicable to the dollar now that the alternative data-grounded cautious tone has been reaffirmed, with sentiment further buoyed by positive trade negotiation momentum. Yet for a more sustained upside in these waters, the much-needed gold-standard hard data remains essential.
CAD: A rate cut and a warning
The Bank of Canada delivered the expected 25 bps rate cut, bringing the policy rate to 2.25%, its ninth cut since last year, totaling 275 bps of easing. With this move, which the Bank considers the lower bound of the neutral range, the message was twofold: the easing cycle is likely over, and the Bank has probably done all it can to counter the impact of U.S. tariffs. Could there be more rate cuts in 2026? It’ll all depend on if things get worse from here.
The currency reaction was particularly telling: the Loonie broke below 1.39 in the face of a rate cut, suggesting the market is now pricing in the convergence of U.S. monetary policy toward an easing cycle, while the BoC, having now reached its target, is likely to turn to hold and observe. Indeed, this cut to 2.25%, which the Bank estimates as the lower end of the neutral range, strongly signaled the easing cycle’s conclusion. Consequently, short-term yields in Canada moved higher, and the odds of a further cut in the final meeting of the year dropped sharply to just 10%. This new rate, according to the BoC, is essentially the ‘just right’ level to manage the economy’s structural adjustment to those sticky trade-related pressures.
The fundamental reason for the cut is that the Canadian economy is genuinely weak. The severe 1.6% economic contraction in the second quarter, fueled by falling exports and poor business investment, forced the BoC’s hand to ease policy. The BoC attributes this downturn primarily to the “severe effects” of U.S. trade actions, which are hitting critical sectors like autos, steel, and lumber. These actions are creating a “wider-than-usual range of risks” and have led to a soft labor market, marked by an unemployment rate of 7.1% and job losses piling up in trade-sensitive sectors. Governor Macklem was explicit, stressing the limits of monetary policy. He noted that the trade conflict has caused “structural damage [that] reduces the capacity of the economy and adds costs,” which “limits the role that monetary policy can play to boost demand while maintaining low inflation.” The single most important development was the Bank’s clear statement that it has probably done all it can to counter the effects of U.S. tariffs.
The accompanying Monetary Policy Report (MPR) provided a sobering return of forward guidance, its first since January, describing the trade conflict not as cyclical, but as a “structural shift” that is “fundamentally reshaping Canada’s economy” and putting it on a “lower path.” The projections are stark: GDP is now forecast to be about 1.5% lower by the end of 2026 than previously anticipated, with sluggish growth expected for the rest of this year and only 1.1% GDP growth projected for 2026. The report highlights that key labor indicators point to greater excess supply, with the 7.1% unemployment rate being the highest since 2016 (excluding the pandemic), confirming that hiring has been “weak” and wage growth has slowed. Despite the cost pressures from tariffs, the BoC expects inflation, currently at 2.4%, to remain near its 2% target, viewing the 2.25% rate as appropriate for this period of structural adjustment. Looking ahead, risks remain “particularly elevated,” centered on the unpredictability of future U.S. trade actions and the upcoming CUSMA review. In summary, the Bank has delivered the required monetary support; the long, difficult economic adjustment will continue to unfold.
As for the USD/CAD, after breaking below 1.39, bounced up from oversold levels, after Powell mentioned during the Fed’s press conference, that the decision for the last meeting of this year in December is not a foregone conclusion, lifting the US Dollar higher, and with it, sending CAD on a volatile ride from 1.389 to 1.397. As demand for the Dollar persists, CAD remains under pressure.
GBP: Traders bet on more pound pain
Section written by: George Vessey
The British pound is having a brutal October, down 1.8% against the US dollar and falling to its lowest level in two years versus the euro. It’s on track for the longest monthly losing streak in nine years against the common currency. The selloff reflects mounting fiscal concerns ahead of the UK Budget and rising bets of Bank of England (BoE) rate cuts.
The pound is coming under pressure as investors brace for potential tax rises and spending cuts in the upcoming UK Budget that may exacerbate the economic slowdown. The UK’s fiscal watchdog is expected to significantly downgrade its productivity growth forecast, making it harder for Chancellor Rachel Reeves to meet her fiscal rules at the Nov. 26 budget.
If confirmed, it could blow a £25–30bn hole in the public finances, forcing Reeves to tighten fiscal policy just as growth falters. That prospect has already triggered a slide in gilt yields and raised market expectations for a BoE rate cut as early as next week. Cooling inflation is also helping the case for rate reductions. On Tuesday, the British Retail Consortium revealed that UK food prices posted the largest monthly drop since late 2020.
Lower yields may offer some relief to the Treasury by reducing debt servicing costs, but they’ve also eroded the pound’s relative yield appeal. Out of a basket of 50 currencies we track, sterling has appreciated against just 2% this month – making this its worst monthly showing since September 2022.
Options markets point to further pound volatility and weakness. The cost of insuring against swings in sterling has surged to its highest premium over the euro since 2023. Risk reversals — a key barometer of sentiment — are now the most bearish on the pound since July, underscoring the market’s growing unease. Finally, as seen in the chart below, the implied volatility spread between 2-month and 1-month GBP options spiked in early October as markets priced in Budget-related risk. But as the event drew closer, that risk shifted into the front-end, collapsing the spread in one of the sharpest one-day moves in over three years. The message is clear: markets view the Budget as a near-term volatility catalyst.
Aussie, Kiwi and Loonie bounce from oversold levels
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: October 27-31
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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.
