EUR/USD Edges Higher on Softer Dollar Outlook

EUR/USD traded moderately higher near 1.1525^[1] in Monday's early European session, holding as the US dollar softens on rising expectations of a Federal Reserve (Fed) rate cut in December. It is believed that the upward bias of the pair is based on the overall US dollar weakness and not necessarily pound strength and traders become cautious before highly anticipated US data^[2] releases. The next PPI (Producer Prices Index) and the Retail Sales reports^[3] in September are likely to give more visibility following a week of dovish-based remarks by the Fed.

Market reports^[4] point out that market participants have raised their bets about a rate cut in December after New York Fed President John Williams indicated that the labour market vulnerability is a higher risk at this point than inflation. The likelihood of reducing the rate increased to 70%, against 40%. the previous week, which was a heavy burden on the greenback^[5] across the board. More apprehensive words by officials such as the Boston Fed President Susan Collins and Dallas Fed President Lorie Logan, however, served to cool expectations^[6] a bit, as it was emphasised that additional easing is not certain until economic evidence is softer.

Market commentators^[7] note that in the case of the pair, the tone near term is supported by the pullback in US yields, but the underlying outlook of the pound is weaker. The economic data in the UK are still portraying a scenario of restrained activity, and the latest poor figures expose the pound to failure in case the US releases^[8] come out of the blue. Any strength in PPI or Retail Sales would probably restart USD demand and question the recent achievements of the pair.

Analysts^[9] indicate that the medium-term risks are thus skewed against sterling though the two are enjoying temporary US dollar weakness. As markets grow increasingly sensitive to shifts in the Fed’s policy outlook^[10], upcoming US data will play a decisive role in determining direction. The EUR/USD therefore remains vulnerable to renewed volatility if the expected reversal in economic activity fails to materialise. The EUR/USD exchange rate remains supported by short-term dollar softness but faces medium-term vulnerability amid shifting Fed expectations.

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GBP/USD Softens as Dollar Strength Caps Recovery

The GBP/USD pair traded near 1.3100^[11] handle in Monday's early trading hours, though it continues to hold comfortably above last week’s lows, suggesting that near-term downside remains contained for now. The pair is believed to get off the back foot at the start of the week, as they are unable to carry on with the small profits^[12] that were made during the last two sessions. However, this overall direction is slightly negative with a stronger US dollar putting pressure on it with markets reviewing their views of the Fed policy easing^[13].

Market reports^[14] indicate that the US dollar Index is trading at multi-month highs, as the slim probability of Fed reducing rates in December has sustained the Index, in the wake of the delayed and largely encouraging US Nonfarm Payrolls report. The rise in the labour market^[15] conditions served to offset the concerns about the drag of the long US government shutdown. This has in turn strengthened the bid of the US dollar and saved the pair on rebounds within the day, with the traders opting to remain in line with the current trend of the dollar.

Market commentators^[16] note that the pound remains trailing its key rivals in the UK in the face of uncertainty before the upcoming Autumn Budget and a rise in speculation that a rate cut as early as next month could be delivered by the Bank of England (BoE). The anticipation of a more relaxed policy^[17], coupled with continuing fears about the prospects of domestic growth, is curbing the popularity of the pound. The risk aversion of the market also puts off any efforts at propelling the two decisively upwards, as market participants are not ready to engage in any significant positioning ahead of significant fiscal and economic^[18] announcements.

Analysts^[19] suggest that in the future, the US data calendar would take control of the sentiment as PPI and Retail Sales will be delayed and the Q3 GDP estimates and PCE Price Index will follow. Any indications of robust economic activity or more adhesive inflation would support a higher-for-longer position of the Fed, which would force GBP/USD^[20]. Although the two can get some support in the short term over the levels of the previous week, the medium-term risks are still all on the downside unless the fundamentals of the UK or the risks in the globe improve significantly. The GBP/USD exchange rate remains under pressure as a firmer US dollar and lingering UK economic uncertainties weigh on the pair.

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USD/CAD Slips as Dovish Sentiment Weighs

The USD/CAD pair remains on the back foot trading around 1.4090^[21] in Monday’s Asian session, as the US dollar continues to soften amid renewed expectations of a Fed rate cut in December. The change of tone occurs after interest-rate futures have undergone a revaluation which has emboldened a slight withdrawal of the greenback after its success last week. Although the pair has been above the 1.4050 support line^[22]; the fact that the upward momentum has been lost shows that there is an increasing tendency by buyers to be cautious before major US data are released later this week.

Market commentators^[23] point out that the market expectations of a December rate cut have also improved with the CME FedWatch Tool increasing its 25-basis-point reduction probability by 69% compared with 44% a week ago. New York Fed President John Williams^[24] and Fed Governor Stephen Miran have confirmed the potential of near-term easing, particularly following less positive signs on the US labour-market, especially following weaker US labour-market indications. This dovish repricing has burdened the US dollar in general, with respect to its ability to maintain higher rates against the Canadian dollar in the short run.

Market reports^[25] point out that the negativity in the pair could be contained since the Canadian dollar is still going through its own headwinds especially due to the declining oil prices. West Texas Intermediate has dropped in four straight sessions, and is heading to $57.90 per barrel on news that the United States is urging a Russia-Ukraine peace plan^[26] that may foster higher world supply of crude. Canada being the top exporter of crude to the US means that the long term pressure on the oil markets is a drag to the Canadian dollar performance.

Analysts^[27] suggest the Canadian dollar has not been helped much by the domestic data either. Statistics Canada noted a 0.7% decline in retail sales in September^[28], as expected, but contrary to the August rebound. As US economic releases with durable goods orders and consumer sentiment surveys to be announced this week, bad news could support the anticipation of Fed easing, providing short-term support to USD/CAD^[29] but long-term risks would lean towards ongoing US dollar weakness. Overall, the USD/CAD exchange rate may see temporary support, but broader pressures continue to favour a softer US dollar over the medium term.

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NZD/USD Edges Lower Amid Shifting Policy Expectations

The NZD/USD pair extended its decline trading around 0.5606^[30] in Monday's early Asian session, as the New Zealand dollar came under renewed pressure. The move is believed to indicate increasing market belief that the Reserve Bank of New Zealand (RBNZ)^[31] will further ease its monetary policy when it meets on Wednesday in November. Since the bank already surprised investors with a greater reduction of 50-basis-points^[32] in October, bigger reductions that could raise the Official Cash Rate to 2.25 are now expected. Such an eventuality of further policy accommodation has trimmed kiwi demand and had the pair pegged near the recent lows.

Market reports^[33] point out that the most recent Financial Stability Report released by RBNZ highlighted the weaknesses that have remained in the local economy, citing global head-winds and imbalanced sectoral performance. These issues solidify the cautionary tone of the central bank and restrain the chances of a policy turnaround in the near future. However, news by the policy makers that the easing cycle is about to end may help NZD/USD^[34] in the short term since speculative positioning is highly against the currency.

Market reports^[35] indicate that dovish remarks by Fed officials have weakened the US dollar in the US; this is a partial offset of the New Zealand dollar weakness. On Friday, New York Fed president John Williams^[36] indicated that cuts to the rate would be possible without jeopardizing the inflation progress. Futures markets are currently pricing in an approximation of 74% of a 25-basis-point cut^[37] in December, which is quite high in comparison to the expectation last week. This has decreased the US dollar upside and has curtailed the sharp fall in NZD/USD.

Analysts^[38] indicate that in the future, economic releases made by the US such as consumer confidence, durable goods orders and the most recent inflation readings will play a vital part in determining the direction of the US dollar. Any indication of the cooling activity or the easing of price pressures can limit the US dollar^[39] which will help stabilise the pair in the near future albeit with the medium-term risks to the pair leaning towards the negative. Overall, the medium-term outlook continues to weigh on the NZD/USD exchange rate.

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