After last week’s charge higher, this week has seen a more modest upward climb for the greenback. Even so, the DXY index still heads into the weekend having notched gains amounting to several tenths of a percent. Perhaps the biggest surprise at first glance is that this figure is not higher, especially given that US core inflation exceeded expectations once again in the week’s biggest data event. That said, as we noted in response to Thursday’s release, softer details and an elevated initial jobless claims print served to cap any greenback upside. Outside the US, Canadian jobs data was even more misleading – with hot headlines attributable to a statistical fluke. Despite this, we suspect that the optics of a 50bp rate cut are now sufficiently unfavourable for the BoC to rule out this option.
Indeed, we think there is little that next week’s Canadian CPI can do to shift the balance of risks for the Governing Council ahead of their policy meeting on October 23rd. The price data should continue to soften, with headline CPI dropping below 2.0% YoY for the first time since 2021, but 25bp cuts are likely to remain the base case from here on out. They are likely to be joined in this by ECB next week in the only major central bank meeting of note. We expect a 25bp cut and look for President Lagarde to signal a move to easing rates at every meeting. In contrast to the eurozone and Canada, however, UK inflation is likely to remain hot under the surface next week. This is despite expectations for a renewed drop in headline CPI growth, which should keep the BoE on its toes. As for the dollar, its fortunes likely lie in the hands of two other events. A meeting by the MoF in China has raised speculation around further stimulus efforts, with the potential to trigger a risk-on move across markets, while traders continue to eye events in the Middle East nervously, with potential escalation continuing to loom as a risk in the background
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Authors:
Nick Rees, Senior FX Market Analyst
María Marcos, FX Market Analyst