US
USD is firmer near this week’s high and still within a tight trading range. Tariff headlines and EU/UK PMI data generated modest FX volatility. Yesterday, US President Donald Trump terminated all trade negotiations with Canada over Ontario’s advertising campaign critical of the White House's tariffs. USD/CAD jumped as much as 0.25% on the news to an overnight high at 1.4028, with key resistance offered at 1.4080 (October 14 high).
US September CPI (1:30pm London, 8:30am New York) and October PMI (2:45pm London, 9:45am New York) take the spotlight today. The final October University of Michigan sentiment index (3:00pm London, 10:00am New York) and Kansas City Fed service index an hour later will play second-fiddle.
US private sector growth momentum is projected to ease slightly in October. The composite PMI is expected to dip to a four-month low at 53.5 vs. 53.9 in September driven by slower services sector activity.
US inflation is expected to remain sticky in September. Headline CPI is seen rising 0.4% m/m vs. 0.4% in August to be up 3.1% y/y vs. 2.9% in August. Core CPI is expected to rise 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.1% in August. For reference, the Cleveland Fed’s Nowcast model forecasts both headline and core CPI at 3.0% y/y in September.
Watch-out for super core services CPI (less housing), a good indicator of underlying inflation trends. In August, this measure printed at 3.2% y/y for a second straight month, signaling that progress towards the Fed’s 2% inflation goal is stalling.
Nevertheless, upside risks to prices are not martializing and leaves room for the Fed to deliver a follow-up 25bps rate cut next week to a target range of 3.75-4.00%. Moreover, restrictive monetary policy can worsen the already fragile employment backdrop and lead to a further downward adjustment to Fed funds futures. Bottom line: USD fundamental downtrend is intact.
JAPAN
Long-term JGB yields remain steady near recent lows. Japan's Finance Minister Katayama signaled the government may have to issue more bonds to fund the upcoming extra budget noting “it can’t be helped if it comes to that.” Earlier this week, Prime Minister Takaichi ordered a fresh package of economic measures that is likely to exceed last year's ¥13.9 trillion (2.2% of GDP) supplementary budget to help households tackle inflation.
Japan September CPI was mixed and October PMI weak. Both headline and core ex. fresh food CPI matched consensus at 2.9% y/y vs. 2.7% in August. However, core ex. fresh food & energy was 0.1pts lower than expected at 3.0% y/y vs. 3.3% in August.
Meanwhile, Japan private sector growth momentum slowed as the flash composite PMI fell to a five-month low at 50.9 vs. 51.3 in September. The details showed the manufacturing PMI dipped 0.2pts to a 19-month low at 48.3 and the services PMI slumped 0.9pts to a four-month low at 52.4.
We still anticipate the BOJ to resume normalizing rates next week or at the very least deliver a hawkish hold which can lift the beleaguered JPY. Fiscal support is set to be ramped up and the Tankan points to an ongoing recovery in real GDP growth. Additionally, core inflation remains well above the BOJ’s 2% target and is tracking above the bank’s projections. In July, the BOJ projected core ex. fresh food and core ex. fresh food & energy CPI to average 2.7% and 2.8% in 2025, respectively.
Japan’s swaps market price-in just 12% odds of a 25bps rate hike to 0.75% at the October 30 meeting and nearly 45% probability of a hike by December. A full 25bps rate increase is priced-in over Q1 2026.
UK
GBP/USD is struggling to recover despite encouraging UK economic data. UK retail sales growth unexpectedly rose in September, underpinned by online jewelers reporting a strong demand for gold. Total retail sales volumes increased 0.5% m/m (consensus: -0.4%) vs. 0.6% in August. Excluding auto fuel, retail sales volumes increased 0.6% m/m (consensus: -0.6%) vs. 1.0% in August. Over Q3, sales volumes are up 0.9% and suggests UK real GDP growth (due November 13) will likely overshoot the BOE’s 0.3% q/q projection.
UK private sector growth momentum surprises to the upside in October. The composite PMI improved to a 2-month high at 51.1 (consensus: 50.5) vs. 50.1 in September. The services PMI also rose to a 2-month high at 51.1 (consensus: 51.0) vs. 50.8 in September while the manufacturing PMI increased to a 12-month high at 49.6 (consensus: 46.6) vs. 46.2 in September.
The swaps market price in roughly 25% odds of a 25bps cut to 3.75% at the next BOE policy on November 6. Over the next 12 months, the swaps market implies 50bps of easing and the policy rate to bottom at 3.50%. The expected fiscal drag from the upcoming UK budget (scheduled for November 26) will likely leave room for the BOE to deliver more easing. As such, we expect further GBP underperformance versus EUR because the ECB is likely done easing.
EUROZONE
EUR/USD had a kneejerk upswing to near 1.1630 before stabilizing lower around 1.1610. Eurozone economic activity unexpectedly gains traction in October driven by the services sector and Germany. The composite PMI overshot expectations in October, rising to a 17-month high at 52.2 (consensus: 51.1) vs. 51.2 in September. The services PMI increased to a 14-month high at 52.6 (consensus: 51.2) vs. 51.3 in September while the manufacturing PMI rose to a 2-month high at 50.0 (consensus: 49.8) vs. 49.8 in September.
The regional breakdown showed the German composite PMI up to a 29-month high at 53.8 (consensus: 51.5) vs. 52.0 in September reflecting the sharpest increase in service sector business activity for almost two-and-a-half years. In contrast, France’s composite PMI plunge to an 8-month low at 46.8 (consensus: 48.4) vs. 48.1 in September.
The swaps market continues to price-in about 50% odds that the ECB delivers one more 25bps cut in the next 12 months and the policy rate to bottom at 1.75%. We think the ECB is done easing while the risk is the Fed cuts rates more than is currently priced-in (117bps in the next 12 months). Bottom line: relative ECB/Fed policy stance underpins the uptrend in EUR/USD.
