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The DXY Index slipped back below 102 again after the October 28 FOMC meeting. The committee voted 10-2 to maintain the Fed Funds Rate at 3.75-4.00%, with both dissenters favouring a 25-bps hike. Although the FOMC statement retained a hawkish bias, Fed Chairman Kevin Warsh’s reluctance to endorse a December hike tempered its impact. Subsequent US GDP and PCE inflation releases did little to restore the USD’s momentum.
The US midterm elections on November 3 and nonfarm payrolls on November 6 will test whether the USD’s loss of momentum extends. The US Treasury 10-year yield retreated below 5% towards 4.90%, as the equity sell-off drove demand for safety. Concerns over cash burn at AI hyperscalers sharpened scrutiny of the investment boom underpinning the US exceptionalism narrative. Stronger headline GDP growth offered limited reassurance about households’ ability to withstand high fuel prices and mortgage rates. A Democratic sweep at the midterms could compound the above risks by increasing the likelihood of legislative gridlock, fiscal confrontation, and a renewed government shutdown.
The USD’s lost momentum does not automatically create a compelling case for the EUR. Europe’s fiscal and political uncertainties, particularly in France, and its vulnerability to elevated energy prices complicate the search for viable alternatives. Nonetheless, the EUR did find support from the European Central Bank providing clearer guidance than the Fed on the prospects of a December hike and Moody’s affirmation of France’s Aa3 sovereign debt rating.
GBP has emerged as a more resilient alternative to the EUR. The October 28 UK Autumn Budget did not unsettle the gilt market and market pricing for an interest rate hike at the November 5 Bank of England meeting. Following the 6-3 vote supporting the September 17 pause, the vote split will likely be 7-2 this Thursday, with more MPC members acknowledging growing inflation risks.
The AUD has largely priced in a 25-bps hike to 4.85% at the November 3 Reserve Bank of Australia meeting. CPI inflation did accelerate to 4.3% YoY from 4% in August, in line with the RBA’s warning. Although the three earlier hikes appear to be cooling the labour market, weak productivity growth continues to sustain inflationary pressures despite subdued consumption growth.
The RBA could, nevertheless, disappoint by following the Reserve Bank of New Zealand’s surprise pause or by delivering a hike while signalling that rates are nearing peak. The RBA’s accompanying Statement on Monetary Policy will likely show 2027 forecasts revised lower for GDP growth and higher for inflation, underscoring the RBA’s difficult policy trade-off. AUD/USD’s recovery from 0.6894 to 0.7032 in the second half of October remains tentative, with the USD also likely to determine if it can break last week’s peak at 0.7068.
Quote of the Day
“We must accept finite disappointment, but never lose infinite hope.”
Martin Luther King, Jr.
Today in history
President Ronald Reagan signed legislation to create a federal holiday honouring Martin Luther King, Jr. in the Rose Garden of the White House on November 2, 1983.
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