The week ahead
Columbus Day in the US yesterday means that the markets for US Treasuries and Dollar settlements were offline. Light volumes and narrow ranges therefore largely prevailed. With a seemingly quieter economic calendar for the week ahead, key FX pairs have produced more rangebound trading patterns. Such ranges should be expected to persist as Autumn progresses so long as energy prices remain capped and there are no surprises from central banks. Aside from these risks, further short-term US Dollar upside is likely limited unless Trump makes a surge in the polls into the November 5th election.
On Thursday, the ECB will publish its latest interest rate decision. A 25-basis point cut remains entirely priced in. Many analysts have noted the details of the ECB’s decision and press conference could uncover a more divided governing council than market pricing suggests. The easing cycle implied by swaps in the Eurozone projects a deposit rate of 2% within 12 months. While the Eurozone’s terminal rate of interest and inflation was lower than the likes of the UK and US, to reach a 2% benchmark rate by the summer of 2025 would demand a lot of monetary intervention from the ECB. It seems that there is a path to this level but whether it is the most likely one could leave the Euro with short term upside if rates are repriced.
Markets remain focussed on US data whilst trying to unpick the Fed’s early November meeting which is due just days after the election. Following the ECB, the next opportunity to do so will be on Thursday with retail sales due. Aside from the US election the debate over a soft landing for the US economy is paramount to identifying what the rest of the calendar year and into 2025 looks like for the greenback. Thanks to Trump largely dropping his anti-strong Dollar narrative, the fundamental image of a protectionist and fiscally expansionary Presidential candidate means that his performance in the polls will be positively correlated with Dollar strength.
Discussion and Analysis by Charles Porter
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