Fed Minutes Keep Dollar Supported

GBP/USD trades with positive bias

The GBP/USD pair trades with a mild positive bias around the $1.3075 area during the Asian session on Thursday, albeit it lacks bullish conviction and remains within the striking distance of a nearly one-month low touched the previous day.

Meanwhile, last week's dovish remarks by the Bank of England Governor Andrew Bailey suggested that the central bank might be heading towards speeding up its rate-cutting cycle. This, in turn, might contribute to the British Pound's relative underperformance and cap any meaningful upside for the GBP/USD pair. Traders might also prefer to wait for the release of the US consumer inflation figures, which along with the US Producer Price Index on Friday, might influence expectations about the Fed's rate-cut path. This, in turn, will drive the USD demand in the near term and provide some meaningful impetus to the currency pair.

Heading into the key data risks, traders on Thursday might take cues from the BoE Credit Conditions Survey to grab short-term opportunities. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the GBP/USD pair is to the downside, suggesting that any subsequent move up might still be seen as a selling opportunity. Spot prices seem poised to extend the recent sharp pullback from the $1.3435 area, or the highest level since March 2022 touched last month.

No Major Data

ECB minutes in focus

EUR/USD remains under pressure for the reasons we discuss above. In focus today will be the release of the ECB minutes from the 11-12 September meeting when the ECB cut rates by 25bp but provided no forward guidance. Since then we've seen a terrible set of September PMI data across the region and ECB speakers have acknowledged dwindling inflation risks and increasing growth risks. Hence the market is now fully pricing 25bp rate cuts in October and December and keeping those EUR/USD swap differentials wide. It seems unlikely that today's release of the minutes can scale back expectations for an ECB rate cut next week – but let's see.

EUR/USD remains soggy. Technically it looks like it can break down to the $1.0800 area. But traders are?not sure US short-dated yields will be the trigger since these have come a long way quite quickly. What would be a trigger is higher energy prices and that's why tension in the Middle East could demand a greater risk premium of the Euro.

Data: 11:30 ECB Monetary Policy Meeting Accounts

Sticky CPI should keep the Dollar supported

Reading through the September FOMC minutes, there seemed no sense of urgency from the Fed to get rates lower – even though it did cut by 50bp. More a sense that the inflation scare was over, unemployment was drifting higher and a risk management approach required a recalibration of policy. There were not any strong signals about how quickly rates would be cut to less restrictive levels and of course, the future pace of rate reductions would be data-dependent. Interest rate markets did not do much on the release of the minutes, with short-dated yields perhaps ticking up 2-3bp in the aftermath.

The reason markets did not do much is that they've already seen a considerable adjustment in short-dated US rates since late September. The Fed's terminal rate for this easing cycle has been repriced 50bp higher over the last few weeks. And short-dated yields have moved significantly in the Dollar's favour. EUR/USD two-year swap differentials have widened from 85bp to 130bp in about three weeks – no wonder EUR//USD is down towards $1.0900.

The big question is, what is the trade from here? Can short-dated US rates rise much further from here? Traders?suspect probably not. But markets?could find out today should US September CPI come in slightly above consensus at 0.3% MoM. That will not be a deal-breaker for a 25bp cut from the Fed in November but perhaps will give the Fed a little less leeway to pursue more aggressive easing. Additionally, later today we have two more Fed speakers in the form of Tom Barkin and John Williams, both seen as modest hawks.

Data: 12:30pm CPI?