Quick Take: Dollar moves on Tuesday will be guided by Fed policy views from its early-November meeting minutes. Despite the Fed keeping rates at 5.50% and not excluding further hikes, markets are focusing on 2024 rate cuts, weakening the dollar. The Euro and Pound both reached multi-month highs against the dollar. Mizuho Bank’s Vishnu Varathan cautions against premature conclusions about the dollar’s trajectory until the December Fed meeting. In the UK, fiscal policy and BoE statements will draw attention, especially after Prime Minister Sunak hinted at limited personal tax cuts. With government borrowing rising but below forecasts, BoE Governor Bailey’s testimony alongside hawkish MPC members will be key. In Canada, lower expected inflation could reinforce the view that the Bank of Canada won’t raise rates again soon, impacting the Canadian dollar’s performance.
After sliding to 3-month lows overnight, dollar moves on Tuesday will be influenced by Federal Reserve policy expectations through the prism of the latest Fed minutes.
The Fed will release minutes from the early-November policy meeting.
The central bank held interest rates at 5.50% at that meeting and emphasised that it would be patient, but did not rule out further rate hikes.
The Fed will still emphasise that it is determined to tackle inflation, but markets will tend to ignore the more hawkish elements given favourable data releases since the meeting.
Growing expectations of 2024 rate cuts have continued to undermine the dollar.
The Euro to Dollar (EUR/USD) exchange rate posted 3-month highs at 1.0965 in Asia on Wednesday with the Pound to Dollar (GBP/USD) exchange rate strengthening to 2-month highs at 1.2540.
Mizuho Bank’s Asia head of economics, Vishnu Varathan still injected an important element of caution; “I think there needs to be a reality check on the fact that the Fed’s take on hawkish bias is not independent of where yields go.”
He added; “There will be a self-checking mechanism if yields fall too much. That means the dollar’s fall might also be impeded, and it’s premature to declare anything one way or another until we see the December (Fed meeting).”
As far as the UK is concerned, attention will focus on both fiscal and monetary policy.
Markets will continue to look for further government briefings and leaks ahead of Wednesday’s Autumn Statement, although Prime Minister Sunak’s comments on Tuesday reinforced strong expectations of limited personal tax cuts.
For the first seven months of fiscal 2023/24, the government borrowing requirement increased to £98.3bn from £76.4bn the previous year, but £16.9bn below the March OBR forecast.
Bank of England rhetoric will also be potentially significant during the day.
Governor Bailey and three other members of the Monetary Policy Committee will testify to the Treasury Select Committee.
Significantly, Haskel and Mann will both be testifying and these two hawkish members again voted for a further rate hike at the November meeting.
The Pound will be vulnerable if either or both of then shift their stance and consider that a further hike is no longer required.
Canada will release the latest consumer prices inflation data.
Consensus forecasts are for the headline annual rate to decline sharply to 3.2% from 3.8% due to a significant extent from favourable base effects.
Core readings are also expected to edge lower.
Weaker than expected readings would reinforce expectations that the Bank of Canada will not increase interest rates again ahead of the December 6th policy meeting.
The Canadian dollar has continued to under-perform in currency markets amid expectations that interest rates have peaked. GBP/CAD advanced to 2-month highs just below the 1.72 level.