Dollar Dominance: Fed Cuts, Elections, and Diverging Economies.
- Dollar Strength: The U.S. dollar index (DXY) has reached its highest level since August, driven by macroeconomic divergence, especially a bearish outlook on the eurozone, and potential Republican gains in the upcoming U.S. elections.
- U.S. Data Impact: This week’s U.S. job and GDP data may not significantly weaken the dollar, despite potential softer job numbers. The dollar is expected to remain strong, with GDP growth forecasted above 3%.
- Euro Struggles: The euro is under pressure due to widening rate differentials, with eurozone GDP and inflation data this week likely to confirm a weak economic outlook and a more dovish ECB stance.
- Sterling Range-Bound: GBP/USD remains stable, with investors focused on U.S. economic data and the U.K.’s Autumn Forecast Statement. Sterling trades near 1.2950, with little movement expected before key announcements.
- Fed and Election Outlook: The Fed is expected to cut rates further this year, but U.S. election uncertainty, particularly Trump’s protectionist policies, continues to support the dollar’s strength.
USD: Dollar at New Highs Amid Global Divergence
The dollar index (DXY) has surged to its highest point since early August, even as the Federal Reserve initiated its easing cycle with a notable 50-basis point rate cut in September. The primary driver behind the dollar’s strength has been macroeconomic divergence, particularly due to a bearish outlook on the eurozone. Additionally, investor sentiment seems to be gearing up for a potential Republican win in the upcoming elections. Though recent polls show slight gains for Donald Trump, his lead in swing states remains within a slim 4-5% margin of error. For more detailed election insights, click here.
Regarding macroeconomic divergence, this week’s U.S. data is unlikely to trigger a significant dollar drop. Key events include job reports, inflation data, and Wednesday’s initial look at third-quarter GDP. Job openings (JOLTS) on Tuesday and the October payrolls report on Friday may come in softer, possibly influenced by hurricanes, which could temper market reactions.
As for inflation, Thursday’s release of core PCE data for September may show an unwelcome 0.3% monthly increase. GDP, on the other hand, is expected to show a robust 3%+ annualized growth, driven by strong consumer activity. Although the Fed is likely to cut rates twice more this year, this week’s data may not drastically shift expectations for the remaining 39 basis points of easing already priced in by markets.
On Wednesday, the U.S. Treasury will announce its quarterly refunding plans. Recent increases in Treasury yields have been linked more to growth and rate expectations than fiscal concerns, and the Treasury may opt to keep a low profile ahead of next week’s elections.
Despite the dollar’s rapid gains this month, it’s unlikely to reverse course anytime soon. The DXY is expected to stay supported within the 104-105 range for now.
EUR: Euro Struggles as Rate Differentials Widen
The euro has endured a tough month, though today’s dip in oil prices provides a small relief. The major challenge for EUR/USD is widening rate differentials, with the two-year swap spread now at 158 basis points—the largest since April. While U.S. data is in focus, the eurozone has a busy week ahead as well.
On Wednesday, the eurozone will release third-quarter GDP data, with expectations that Germany may enter a technical recession and the region may only grow by a modest 0.2% quarter-over-quarter. This will be followed by October’s flash CPI release, where headline inflation is forecast to stay below 2%, and core inflation is expected to dip from 2.7% to 2.6%. These figures support the market’s belief that the ECB is pivoting toward a more dovish stance, aiming to lower rates to neutral as quickly as possible.
The ESTR curve is currently pricing in a 35-basis point cut at the ECB’s December meeting, which could increase to 50 basis points if eurozone data weakens or if Republicans win the U.S. elections, raising concerns over protectionist policies.
For now, EUR/USD is likely to consolidate within the 1.0765-1.0850 range.
GBP: Sterling Stagnates as Investors Await Key Data
The British pound (GBP) remains range-bound, hovering around 1.2950 against the U.S. dollar during Monday’s London session. The GBP/USD pair is trading sideways, with investors eyeing key U.S. economic data and the U.K.’s Autumn Forecast Statement, due on Wednesday.
The U.S. Dollar Index, which measures the dollar’s strength against six major currencies, is near a three-month high at 104.60. Market attention will be on U.S. third-quarter GDP and October non-farm payroll data, both of which will provide insights into economic growth and labor demand. These reports will heavily influence expectations for the Federal Reserve’s interest rate outlook for the rest of the year.
The Fed kicked off its policy-easing cycle with a larger-than-expected 50-basis point rate cut in September, reflecting concerns over growing economic risks while maintaining confidence that inflation remains on track to meet the 2% target.
Traders anticipate the Fed will lower rates by 25 basis points each in November and December, according to CME’s FedWatch tool.
Meanwhile, uncertainty surrounding the U.S. presidential election continues to buoy the dollar. Last week’s IMF meetings highlighted concerns over Trump’s vow to impose new tariffs on all nations, which could increase global supply chain costs if he wins against current Vice President Kamala Harris.