US
USD remains firm against most major currencies supported by an upward adjustment to US rate expectations after Fed Chair Powell cooled rate cut bets on Wednesday. Fed funds futures imply 66% probability (down from over 90% earlier this week) of a 25bps cut at the next December 10 FOMC meeting. Dampened Fed rate cut expectations has also taken the steam out of the rally in risk assets.
We are sticking to our view that the Fed will deliver a follow-up 25bps cut to 3.50%-3.75% in December because restrictive Fed policy can worsen the already fragile employment backdrop and upside risk to inflation are not materializing. Next week’s set of US private-sector data (ISM, JOLTS, ADP, Challenger job cuts, Michigan sentiment survey, NY Fed survey) will offer clues about the employment and inflation outlook. In the meantime, we doubt USD can sustain a break above the range that’s held since June.
The ongoing US government shutdown continues to see no resolution as both parties remain at an impasse. Senators are scheduled to meet again on Monday November 3. Fed speakers today include: Dallas Fed President Lorie Logan (2026 FOMC voter), Fed Presidents Beth Hammack (2026 FOMC voter) and Raphael Bostic (non-voter).
EUROZONE
EUR/USD is range bound just above this month’s low around 1.1540. Next support is offered at 1.1500. As was widely expected, the ECB left the policy rate unchanged for a third consecutive meeting at 2.00% yesterday. The ECB also suggested the bar for more easing is high.
The ECB noted “the economy has continued to grow despite the challenging global environment,” while some of the downside risks to growth have been mitigated. Moreover, ECB President Christine Lagarde stressed again that monetary policy settings remain in a “good place” and that that there was “absolute unanimity” to stand pat.
The swaps market still price in 50% odds of a 25bps cut in the next 12 months. In our view, the ECB is set for an extended pause as Eurozone inflation is stable around the ECB’s 2% target, and PMI data points to an ongoing recovery in economic activity. That should offset some of the drag to EUR/USD from the less dovish Fed easing outlook.
The Eurozone preliminary October CPI supports the ECB’s on hold stance. Headline CPI matched consensus at 2.1% y/y vs. 2.2% in September, core CPI printed at 2.4% y/y for a second straight month (consensus: 2.3%) and services CPI ticked up 0.2pts to a six-month high at 3.4% y/y.
JAPAN
USD/JPY is consolidating yesterday’s sharp gains with the next major resistance offered at 155.00. Japan Finance Minister Satsuki Katayama warned against excessive yen moves. Katayama said “We’ve recently seen very one-sided and rapid currency moves…The government is closely monitoring excessive or disorderly movements in the foreign exchange market, including those driven by speculative moves, with a high sense of urgency.”
Katayama’s warning on yen volatility rings hollow. A more hawkish Bank of Japan (BOJ) yesterday would’ve done more to support JPY. Instead, the BOJ’s laid-back policy stance means any intervention will only slow, not stop the yen’s slide. The BOJ would be throwing good money after bad.
CHINA
USD/CNH is up near 7.1200 on USD strength. China’s October PMI was soggy. The official headline PMI fell 0.6pts to 50.0 (the lowest since December 2022) indicative of stagnant growth. The details showed the manufacturing PMI dropped more than expected to 49.0 (consensus: 49.6) vs. 49.8 due to a holiday-shortened October and a tougher global trade environment. The non-manufacturing PMI matched consensus at 50.1 vs. 50.0 in September.
The US and China trade truce improves the outlook for China’s manufacturing sector. However, to address China’s domestic imbalance, the country must shift its growth model toward one in which domestic consumption plays a greater role. In our view, a gradual revaluation of China’s currency could help China stimulate consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
COLOMBIA
Colombia’s central bank is widely expected to keep the policy rate at 9.25% for a fourth straight meeting (6:00pm London, 2:00pm New York). Like in the previous three meetings, the vote split should remain unchanged at 4 (on hold), 2 (50bps cut), and 1 (25bps cut). The convergence of headline and core CPI inflation toward the 3% target is stalling and supports the case for keeping rates on hold. The swaps market implies a 25bps rate hike to 9.50% in the next 12 months.
