GBP/USD Drifts Lower Amid Shifting Policy Expectations

GBP/USD remained under pressure, trading near 1.3150[1] in Wednesday's early trading hours, as the pair extended its four-session losing streak. The subdued tone is believed to indicate investor caution ahead of the UK’s October inflation[2] releases. Key indicators, such as CPI, PPI Core Output, and the Retail Price Index, are scheduled for release later today. Price action indicates that buyers are still on the sidelines and the two are struggling to retake short-term resistance areas as markets prepare to receive data that can support anticipation of a more dovish Bank of England (BoE)[3] policy.

Market commentators[4] note that any easing of UK inflation together with recent indications of declining labour markets and slower GDP are bound to bolster the argument in favour of the BoE cutting the rates in December. This is generally a bearish pound outlook that curtails any upside gains in GBP/USD despite the sporadic US dollar consolidation. The market participants are assessing whether the UK price pressures[5] will be softened enough to justify the earlier policy loosening a factor that keeps the medium term risks skewed against the pair.

Market reports[6] indicate that on the US dollar side, the greenback is standing strong because expectations of a federal reserve (Fed) rate cut in December are eroding. According to the CME FedWatch Tool[7], market prices are as low as 25-basis-point reduction to 49%, significantly lower than the 67% previous week. Even though the latest US labour signs, such as increased jobless claims[8] and poor ADP employment patterns, suggest a slowdown in the pace, the numbers have not yet transformed the policy perspective at the Fed in a decisive manner. This motion offers continuous support to the Dollar and burdens GBP/USD.

Analysts[9] indicate that focus now shifts towards future US employment data, such as the upcoming Nonfarm Payrolls report, which may bring new volatility. Although short-term stabilisation can be achieved around the current levels, GBP/USD[10] has an unequal balance of risk skewed to the downside without UK data recording any unexpected improvement or US indicators falling by a significant margin.

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EUR/USD Steadies as Dollar Strength Limits Gains

EUR/USD traded near 1.1580[11] in Wednesday's early trading hours after three consecutive sessions of declines, as the US dollar maintains a firm tone. The modest recovery efforts of the pair are believed to be still limited by the revived demand of the greenback, traders re-evaluating hopes of a Fed rate cut[12] in December. The markets have started pricing in an approximate 49% chance of a 25 bps cut [13], down a week prior, and it lowered downward pressure on the US yields and restricted the upside potential of the euro in the near term.

Market reports[14] indicate that the recent US labour market data have been mixed but they indicate that the market in general favours a cautious approach to policy easing. Initial Jobless Claims[15] slightly increased to 232,000 in the week to October 18, but Continuing Claims rose to new highs in several weeks. Moreover, ADP[16] estimates indicated that employers lost an average of 2,500 jobs in the four weeks through November 1, showing signs of crevices in the employment situation. Such softer signals can tone down aggressive buying of the US dollar but will hardly alter a mood in the face of forthcoming major Nonfarm Payrolls issues.

Market commentators[17] observe that the remarks made by Richmond Fed President Thomas Barkin only enhanced the ambiguity regarding the future of the policy by pointing to a more moderate labour market and the remaining concern of the inflation direction. His comments imply that the Fed is not rushing to shift toward easing without clearer evidence of cooling conditions. This stance continues to underpin the US dollar and leaves EUR/USD vulnerable to further downside momentum.

Analysts[18] suggest that sentiment in the Eurozone is low given that the European Central Bank (ECB) is universally assumed to maintain rates intact on the basis of stable inflation but low growth momentum. Although this ensures that the EUR/USD has some ground in the short-term, the wider disparity between the Fed and the ECB policies expectations is still a medium-term threat to the pair.

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USD/CAD Climbs as Oil Weakness Pressures Loonie

USD/CAD extended its rebound trading around 1.4000[19] in Wednesday's Asian trading session, after posting a 0.5% decline in the previous session. The recovery of the pair is believed to show renewed weakness in the commodity-linked Canadian dollar[20] with the fall in prices of the crude oil after a prolonged accumulation in US inventories. As the latest API data shows a 4.4 million-barrel[21] increase in crude stocks, the largest in more than five months, oil markets have turned defensive. This has curbed demand for the Canadian dollar and helped USD/CAD find near-term support above the psychological 1.4000 level.

Market reports[22] point out that a more relaxed mood in the energy markets is associated with the growing concern of the possibility of excessive supply of energy in the world next year, supported by the latest forecasts of the International Energy Agency (IEA). These forces limit the upside of the Canadian dollar in spite of potentially strong domestic fundamentals. Although the core inflation indicators of Canada[23] are firmly pegged at about 3% and the labour market is currently performing well, the markets believe that the Bank of Canada (BoC) will remain cautious and hold the interest rates constant until 2026. This restricts the potential of the Canadian dollar performance and cushions USD/CAD on dips.

Market commentators[24] note that in the meantime the US dollar is supported by rotating Fed expectations. The CME FedWatch Tool[25] indicates a 49% chance of a December rate reduction falling down to 67% last week, an indication of diminished belief in close-by policy relaxation. This repricing helps to perpetuate the larger US dollar-related tone and is part of the continuing USD/CAD demand especially as traders respond to changes in rate-differential dynamics.

Analysts[26] note that focus shifts to future economic data of the US such as mid-week labour indicators and sentiment surveys that may affect near-term volatility. Any indication of decreasing activity or less vigorous consumer demand could help contain the strength of the US dollar and limit USD/CAD upside. But as long as the oil-induced Canadian dollar[27] pressure continues, the pair will continue to be supported in the short term, although medium-term risks lean toward consolidation as US data weakens further.

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NZD/USD Drifts Lower Amid Growing Policy Uncertainty

The NZD/USD pair remained under pressure, trading near 0.5630[28] in Wednesday’s European session as sellers maintained control. The sustained downside bias reflects growing expectations of an imminent interest rate cut from the Reserve Bank of New Zealand (RBNZ). It is believed that the pair’s inability to sustain any form of corrective rebound signals a market[29] that is gradually pricing in more benign domestic fundamentals. This leaves the New Zealand dollar susceptible to a weaker US Dollar in the near term ahead of key US data releases.

Market commentators[30] note that the latest New Zealand labour market data contributed to the gloomy mood, with Unemployment Rate reaching 5.3% in the third quarter. This has intensified the argument in favor of easing policies, given the worsening employment situation, dampened economic momentum and reduced inflation pressures. A 25 bps reduction by the RBNZ next week is now being anticipated by markets and NZD/USD[31] remains subject to this, which constrains the possibility of any longer term upward correction.

Market reports[32] point out that the focus has now shifted to the upcoming FOMC Minutes, as it may provide new information regarding the policy position of the Fed. Any sign that policymakers are still wary of reductions in rates, especially when debate is hawkish, would support the US dollar[33] and strengthen opposition near 0.5650-0.5670. This exposes NZD/USD to further depreciation, particularly in case the US policy makers express their worries on inflation persistence or indicate that they would like to keep the restrictive policy a little longer.

Analysts[34] suggest that the coming out of the deferred September Nonfarm Payrolls report of the US will be important in the short-term direction. A less-than-expected print, which analysts are predicting to be 50,000 jobs, will revive the underlying momentum of the US labour market[35], and will give the two a short-term lifeline. Notwithstanding, the medium-term risks of NZD/USD are probably biased towards the downside unless the data significantly changes the expectations of Fed easing.

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