- Hawkish hold for Fed, ECB, and BOJ. BOC and RBNZ seen hiking.
- UK budget and Australia CPI to guide policy rate expectations.
- Brazil and Israel head to the polls.
AI spending concerns and firmer crude oil prices weighed on risk sentiment last week. The flight to safety pushed 10-year Treasury yields below 5% and lifted JPY. EUR was the worst performing G10 currency as Frace’s fiscal troubles widened bond spreads.
AUD outperformed on a hawkish shift in RBA rate expectations. NOK and CAD benefited from higher crude oil prices, while resilient UK economic activity underpinned GBP. BRL led gains as prediction markets increasingly favored a victory for right-wing candidate Flávio Bolsonaro in today’s Brazilian presidential election runoff.
Markets will take their cue this week from Fed, ECB, BOJ, BOC, and RBNZ policy decisions. The UK budget and Australian CPI data also warrant attention. Outside the G10, Israel’s election takes center stage, alongside central bank decision in Chile, Colombia, and Thailand.
Hawkish Holds
Fed policy decision (Wednesday). The FOMC is expected to keep the Fed funds target range steady at 3.75-4.00% after raising rates 25bps in September. Calls for patience from several key Fed officials support a pause. Futures market imply only 10% odds of a hike this week, with a December 9 rate increase virtually fully price in.
The FOMC vote split and Fed Chair Kevin Warsh’s assessment of inflation are poised to keep a December hike in play. We lean towards a 9-3 vote to hold, with Beth M. Hammack, Neel Kashkari, and Lorie K. Logan dissenting in favor of a 25bps hike, as they did in July. Warsh is also likely to reiterate that inflation remains too high and underlying inflation pressures have yet to improve meaningfully.
Overall, robust US economic activity and rising price pressures argue for additional Fed funds rate hikes, offering ongoing USD support. The October composite PMI remains consistent with booming private sector growth while the sharp increase in selling prices points to upside inflation risk. Thursday’s September PCE and Q3 real GDP releases will provide the next real data check.
Headline PCE is seen rising 0.5% m/m vs. 0.3% in August and quicken to 3.6% y/y vs. 3.4% in August. Core PCE is expected to rise 0.3% m/m vs. 0.2% in August and quicken to 3.1% y/y vs. 3.0% in August.
Real GDP growth is anticipated to rise 3.2% annualized vs. 2.2% in Q2 driven by consumer spending and AI-related business investment. The Atlanta Fed’s GDPNow and New York Fed GDP Nowcast estimates point to Q3 growth of 3.5% and 2.7%, respectively.
European Central Bank (ECB) policy decision (Thursday). The ECB is widely expected to keep rates on hold at 2.50% after September’s 25bps hike. Contained Eurozone underlying inflation and tighter financial conditions give policymakers scope to wait. Nevertheless, resilient economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (75% priced in).
France’s bond market turmoil is likely to dominate ECB President Christine Lagarde’s press conference. Reassurance that the ECB stands ready to contain unwarranted contagion can cushion EUR, but France’s fiscal troubles leave EUR/USD vulnerable to a decline toward 1.1000. See here for details.
Bank of Japan (BOJ) policy decision and Outlook Report (Friday). The BOJ is widely expected to keep rates on hold at 1.25% and assess September’s 25bps hike before tightening again. In September, BOJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched.
Still, firmer underlying inflation leaves scope for a more hawkish Outlook Report, lifting BOJ rate expectations in favor of JPY. The swaps curve price in 75% odds of a 25bps BOJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.
Hikes in the Pipeline
Bank of Canada (BOC) policy decision and Monetary Policy Report (Wednesday). The BOC is expected to start tightening with a 25bps hike to 2.50%, after holding rates steady since December 2025. BOC Governor Tiff Macklem’s warned recently that “the risk that inflation broadens and becomes more persistent has gone up.” The swaps curve price in 85% odds of a hike this week.
The BOC is also expected to raise its inflation and real GDP forecast. September headline CPI printed at 3.1% y/y, exceeding the bank’s 2.5% Q3 projection, while Q2 real GDP grew 3.3% annualized vs. the bank’s 2.5% projection. The average of CPI trim and median was 1.85% y/y in September, tracking just below the BOC’s 2.0% Q3 projection. But the pick-up in firm’s one- and two-year inflation expectations could lift the core CPI outlook, reinforcing the case for further hikes and bode well for CAD.
RBNZ policy decision (Wednesday). The RBNZ is expected to deliver a third straight 25bps policy rate hike to 3.00%. New Zealand headline inflation is above target, and the recovery in economic activity is intact. The swaps curve price in 88% odds of a 25bps RBNZ rate hike this week.
The risk is the guidance could turn more hawkish because of persistently higher crude oil prices. A return to “further OCR increases appear likely at upcoming meetings” would mark a shift from September’s softer tone that the hike “reduces the risk that the OCR needs to increase by more later.” Such a shift can boost NZD.
Mind the Fiscal Gap
UK Autumn Budget (Wednesday). The focus is whether the government preserves the planned fiscal tightening and keeps gilt issuance in check.
In March, the OBR projected the cyclically adjusted primary balance, which excludes interest costs and adjusts for the economic cycle, to improve from a 0.3% of GDP deficit in 2026/27 to a 0.3% surplus in 2027/28, implying a fiscal drag of 0.6% of GDP.
Meanwhile, analysts expect 2026/27 total gilt sales of £249.6bn, up £3.4bn from April’s plan, but £2.5bn below March’s original figure.
Maintaining or increasing the fiscal squeeze should support gilts by easing inflation pressure and tempering BOE hike expectations. For GBP, stronger fiscal credibility would compete with lower rate support and limit upside. By contrast, fiscal slippage and heavier gilt issuance can drive gilt yields up and GBP down.
Australia CPI to Bolster AUD’s Yield Edge
Australia September and Q3 CPI (Wednesday). Headline CPI is expected to rise to 4.2% y/y vs. 4.0% in August, while trimmed mean CPI is projected to hold at 3.6% y/y for the fourth month and second straight quarter.
These readings would leave inflation above the RBA’s year-end forecasts of 3.6% for headline and 3.3% for trimmed mean. That would back Deputy Governor Andrew Hauser’s warning last week that the inflation outlook is “materially worse” than assessed in August.
Firmer inflation would also strengthen the case for a back-to-back 25bps RBA cash rate hike to 4.85% at the next November 3 meeting (70% pried in) and widen AUD’s yield advantage.
Israel’s Ballot Test
Israel legislative election (Tuesday). A party bloc requires 61 of the 120-seat Knesset to form a stable government. Polls show Prime Minister Benjamin Netanyahu’s bloc and the anti-Netanyahu bloc led by Gadi Eisenkot falling short of a majority. However, the Eisenkot camp is leading and could cross the 61 seats threshold with support from the Arab parties.
A Netanyahu bloc victory would revive the judicial overhaul, raising concerns about the rule of law and political stability, and weigh on ILS. A centrist Eisenkot government would likely reduce institutional and geopolitical risk and support ILS.
Markets Bet on Bolsonaro
Brazil’s polls close at 5pm Brasilia time on Sunday and results should come relatively fast. Rightist Senator Flávio Bolsonaro of the Liberal Party (PL) won 47% of the vote in the first round against 45% for leftist President Luiz Inácio Lula da Silva of the Workers’ Party (PT), overturning the incumbent’s narrow polling lead.
Prediction markets put the probability of Bolsonaro winning the presidential runoff at 80%. A victory could extend BRL gains, though the rally since the first round may limit upside. A Lula win risks a sharper selloff as investors unwind those bets. The winner will start a four-year term on January 5.
Elsewhere…
Chile’s central bank is widely expected to keep the policy rate on hold at 4.50% for a sixth straight meeting (Tuesday). Bank of Thailand is widely expected to keep the policy rate at 1.00% for a fourth straight meeting (Wednesday). Colombia’s central bank is expected to pause tightening and keep rates at 12.25% (Friday).
