News & Analysis

USD

The US presidential elections should be the primary focus for North America this week, albeit against the backdrop of a busy docket in both the US and elsewhere. Specifically, markets are due to see inflation data from both the eurozone and Australia, the first reading of Q3 GDP and a jobs report from the US, election results and a BoJ decision in Japan, not to mention a pivotal budget announcement in the UK. All told, this should see FX market volatility climbing higher this week, with many moving parts to factor in. Nevertheless, following a more restrained than expected Israeli retaliation over the weekend, we suspect a ratcheting down in tensions across the Middle East and a fading dollar haven bid should help put a ceiling on the DXY index, which currently trades just north of 104 this morning.

JPY

Despite the busy calendar of events coming up across the US and elsewhere, it is Japan that is in focus on Monday morning following a snap general election. Importantly, the ruling LDP-led coalition appears to have lost their majority in the lower house for the first time since 2009. The ensuing uncertainty and risks of a dovish policy tilt have seen USDJPY climb to levels not seen since late July ahead of a BoJ decision later this week.

EUR

For the eurozone, CPI data is the key event this week. Markets expect a rebound in headline inflation, with CPI growth rising from 1.7% to 1.9% YoY on energy base effects. That said, core inflation should continue to ease, keeping the ECB on track to continue cutting rates at December’s meeting. The big outstanding question is how big that cut will be. An undershoot for inflation readings this week could well see some centrist members of the Governing Council joining their more dovish colleagues in calling for an acceleration to easing by 50bps, suggesting that EURUSD risks should be skewed to the downside this week.

GBP

The budget is the main event for sterling traders this week, with Rachel Reeves’ widely anticipated appearance in the Commons expected to start just after 12:30 GMT on Wednesday. Our base case remains that market sentiment is overly bearish ahead of the event, with a string of less-than-market positive stories over the past month serving to keep traders wary. This leaves a low bar for the Chancellor to beat, albeit, given headlines over the weekend, we are a little less certain that she will manage this at the start of the new week. Specifically, there was seeming confirmation that Labour will look to raise circa £20bn from increases to employer National Insurance contributions. As we laid out in our preview, this policy is unhelpfully distorting for incentives, and will not raise the kind of money on net that the Treasury expects it will. Even so, if she accompanies this with a modest tweak to fiscal rules, a significant boost to investment spending, and some other well-needed tax reforms, we are still inclined to think that the overall picture is positive for UK growth, an outcome that should be sterling positive on Wednesday afternoon.

CAD

Domestically, August GDP is the major event of note for Canadians this week. That said, events south of the border should be just as consequential if not more so for the loonie. In particular, given Canada’s reliance on trade with the US, the risk of a Trump presidency and the associated tariffs should be keeping traders on their toes ahead of polling day on November 5th. With this in mind, we think the stage is set for the loonie to underperform again this week. USDCAD is currently flirting with 1.39 – another poll move in favour of Trump, or a soft set of domestic prints, and 1.40 is not out of the question.

 

 

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