The Dollar's Rally May Take a Pause
Impact on GBP: Sterling gains ground amid rate cut speculation and economic challenges
GBP/USD is moving higher towards $1.3000 during Asian trading on Wednesday. However, Sterling (GBP) is facing challenges from declining consumer and producer inflation rates, along with weak labour market data in the United Kingdom. These factors are raising expectations that the Bank of England may implement a 25 basis point rate cut in November, followed by another quarter-point cut in December.
On Tuesday, BoE Governor Andrew Bailey emphasised the need for the UK central bank to enhance its capacity to monitor developments in the less transparent non-banking sector. Speaking at a Bloomberg event in New York, Bailey remarked, "We are approaching a point where we need to pivot from rule-making to surveillance" to better track financial activities outside traditional banking.
The Pound Sterling enters the budget as one of 2024's best-performing major currencies, thanks to the Bank of England's cautious approach to interest rate cuts amid better-than-expected economic data in the first half of the year.?
A well-received budget and a steady approach to rate cuts could further support Sterling's outperformance, especially against the Euro and other European currencies.
Major Data:
19:45 -?BOE Gov Bailey Speaks
Impact on EUR: EUR/USD struggles as swap rate gap widens and the ECB maintains dovish tone
EUR/USD briefly fell below $1.0800 overnight and may stabilise around current levels, but a sustained rebound seems unlikely. The USD two-year swap rate gap has widened to its largest since May (145bp), with no clear drivers for a near-term narrowing.
The gap is likely to remain wide as ECB officials maintain a dovish tone. Even hawkish members like Austria’s Holzmann haven’t opposed market expectations for back-to-back ECB rate cuts through mid-2025. President Christine Lagarde reinforced this in a TV interview yesterday.
Today’s Eurozone calendar includes October’s consumer confidence and more ECB speakers, including Lagarde and Chief Economist Lane. However, the policy direction seems clear, and markets may begin to overlook these remarks. If PMI data doesn't surprise, the ECB is expected to keep cutting, capping EUR short-term swap rates. EUR/USD continues to target?$1.0700 before the US election.
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Major Data:
15:00 -?ECB President Lagarde Speaks
Impact on USD: Dollar strength, rising treasury yields and election uncertainty
The Dollar continues to benefit from multiple supportive factors. US 10-year treasury yields have risen by 15 basis points this week, and the 2-year USD OIS is edging higher, with only 37 basis points of Fed easing priced in. Oil prices are rebounding, and the approaching US election could drive deleveraging and defensive repositioning.?
One key call for the next two weeks is that implied 1-month volatility in USD pairs could rise relative to historical levels, following patterns seen before the 2020 and 2016 elections. A potential liquidity squeeze next week may also see less liquid currencies like NOK underperforming.
In the US, today’s calendar is light with MBA mortgage applications and home sales figures. The Fed’s Beige Book at 19:00 could impact markets, as recent softness in growth prompted the September rate cut. We’ll also hear from FOMC hawks Bowman and Barkin today. While mid-week Dollar momentum may wane, risks remain skewed to the upside ahead of the election.
No Major Data
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