• Dollar Rally Pause Likely Temporary: The recent dip in the dollar seems brief, with strong U.S. economic indicators and political dynamics providing support for continued strength in the near term.
• Mixed U.S. Job Data: While jobless claims fell, ongoing claims rose due to recent severe weather, with solid economic indicators like the S&P PMI showing resilience amid eurozone struggles.
• Election’s Potential Impact: With Trump slightly ahead in swing states, markets are hedging for a possible Trump presidency, which could increase dollar volatility due to anticipated policy shifts.
• ECB Shifts to Intuitive Decision-Making: The ECB’s recent tone change hints at rate cuts, influenced by U.S. election risks and weak eurozone PMIs, leaving EUR/USD vulnerable to further declines.
• UK Budget Spurs Market Focus on Gilt Yields: Chancellor Reeves’s planned fiscal rule changes point to more UK borrowing, increasing pressure on gilt markets and adding downside risk for GBP ahead of the budget announcement.

USD: Temporary Halt in Dollar Rally?

Yesterday’s slowdown in the dollar rally looks like a brief pause rather than the start of a larger trend. A recent selloff in Treasuries triggered a slight dip in U.S. yields, softening the dollar. However, with strong U.S. macro and political indicators, the dollar remains well-supported for now.

Recent U.S. job data sent mixed messages: while jobless claims unexpectedly fell, ongoing claims rose, likely influenced by recent extreme weather. High-frequency economic indicators remain solid, and the S&P Global composite PMI reported a surprising uptick. The eurozone’s economic struggles further support the dollar’s strength in the near term.

Today’s U.S. calendar features durable goods orders for September and a speech by FOMC’s Susan Collins. Federal Reserve officials, like the market, appear to be in a wait-and-see mode ahead of upcoming labor and inflation data that may influence further rate cuts this year.

Political developments could be another focus, as polls show a close race with Donald Trump leading in several swing states. Vice President Kamala Harris is making efforts to gain ground, particularly in Georgia. While polls show her gaining traction in Wisconsin and Michigan, the election remains tightly contested, leaning slightly in Trump’s favor based on betting odds and market sentiment. The potential impact of a Trump presidency on the dollar—given his policies on protectionism, taxes, and the Fed—suggests continued volatility for the currency.

EUR: ECB’s New “Gut Feeling” Strategy

The European Central Bank is moving from data-driven decisions to a more intuitive approach, highlighted by Bundesbank President Joachim Nagel’s recent comments on rate cuts. Nagel, one of the ECB’s more hawkish voices, refrained from dismissing a potential 50-basis-point cut in December, a notable change. With Germany’s PMI beating expectations but the eurozone as a whole remaining weak, the U.S. election could now be a critical factor for the ECB’s December decision.

Markets appear to be pricing in some “Trump risk” into ECB forecasts, with a potential 35-basis-point rate cut by year-end. EUR/USD’s slight recovery above 1.0800 seems fragile, with risks pointing to a potential drop to 1.0750 in the near term.

GBP: Reeves Sparks Gilt Market Reaction

In the UK, Bank of England hawk Catherine Mann voiced caution about disinflation, while Governor Andrew Bailey’s remarks offered limited insights. However, markets are closely watching next week’s UK budget, following Chancellor Rachel Reeves’s announcement to alter fiscal rules and increase investments, signaling potentially larger borrowing.

The gilt market responded, underperforming compared to other developed markets. For currency markets, the pound could face downside risks if increased borrowing sparks market volatility. Ahead of the budget and U.S. election, GBP/USD may be positioned for a bearish run, possibly reaching 1.28 in the near term.