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USD
The Fed is the only story in town for FX markets right now. The debate around easing by 25bps or 50bps has reached a fever pitch in recent days, albeit, with little additional clarity on the likely outcome of today’s FOMC meeting to show for it. Markets continue to price tonight’s rate decision as close to a toss-up. We are firmly in the 25bp camp. Admittedly, we can see the case for a greater dose of easing, not least because we thought the Fed should have cut rates back in July. But, the signalling effect of a larger rate cut should weigh against such a move. Markets are already pricing a pace of easing that we think is too aggressive, and a terminal rate that looks too low – an endorsement from the Fed tonight would only exacerbate this problem. More to the point, we don’t think there is a need to rush at present. The labour market has normalised, but there are few signals of a more worrying unwind, despite recent market consternation. With this in mind, we expect a 25bp cut from the Fed, a signal for two more such moves this year, and 100bp of easing in 2025. If we are right, this would be a much shallower rate path than markets are currently positioned for, with swaps implying 10 full rate cuts over the same time horizon. If we are right, then a sharp greenback rally should be on the cards this evening, with a 1-2% upside for the broad dollar not out of the question by week-end.
EUR
Yesterday’s ZEW survey reading proved grim, even relative to both our own and markets’ low expectations. Even so, the impact on EURUSD was minimal, with traders squarely focused on the other side of the Atlantic given the importance of today’s Fed meeting. Indeed, while we think that EURUSD looks rich at current levels, it will almost certainly need a push from Chair Powell to break lower today, with domestic eurozone data likely to offer little impetus for the pair.
GBP
This morning’s August CPI print delivered few surprises for the BoE, leaving the odds of a rate cut tomorrow largely unchanged, with only the barest hint of a tick higher for sterling. Looking at the details, headline CPI growth remained unchanged at 2.2% YoY, matching consensus expectations, but 0.2pp below Bank staff forecasts. Core and services inflation rose to 3.6% and 5.6%, up from 3.3% And 5.2% respectively, in line with economist projections. All-in-all then, we think the 25% odds of a rate cut tomorrow look fair for now, though a 50bp cut from the Fed later today could see these chances climb ahead of tomorrow’s announcement if realised.
CAD
As expected, yesterday’s data proved largely unimpactful for USDCAD. This was despite US retail sales offering support for the broad dollar, and Canadian CPI printing soft. As we noted yesterday morning, we think it will need a hand from central bankers for USDCAD to break higher. Fortunately, then, there is a crammed docket of commentary through to week-end. On the US side, the Fed and Chair Powell are the clear focus for today, but the BoC Summary of deliberations published this evening should not be overlooked either, while Governor Macklem rounds out the week with a speech on Friday. If our expectations are met for the Fed to skew hawkish relative to market pricing, even as the BoC stays dovish, this should unlock another leg higher for USDCAD, with 1.37-1.38 likely to be in range.