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Once again, there is disagreement among the members of the ECB Governing Council about what the monetary policy reaction function of the European Central Bank should look like. In the one hand, Mario Centeno, head of the Banco de Portugal, argued in favor of lowering the ECB deposit rate to 2% on autopilot. Yannis Stournaras, governor of the Bank of Greece, recently sounded a similar note. On the other hand, ECB chief economist Philip Lane and Bundesbank chief Joachim Nagel argue in favor of a cautious, discretionary approach, Commerzbank’s Head of FX Research Ulrich Leuchtmann notes.

The upcoming ECB approach means everything

“The latter may also end up with a deposit rate of 2%, too. Nevertheless, in my opinion, both approaches have different consequences for the EUR exchange rates. Please note that the valuation of a currency in the foreign exchange market is not primarily determined by expected returns (the ‘carry’). The differences in these are negligible compared to what can be gained or lost from exchange rate fluctuations.”

“Now, a monetary policy that changes the key interest rate on autopilot runs the risk of missing out on new developments. If you have switched on autopilot, you tend to miss out on new situations. In particular, because the ECB was the very last G10 central bank to react to the post-corona inflation shock, it has the stigma of sometimes missing crucial developments.

“I think the market would not appreciate an ECB monetary policy on autopilot at all and would respond with visible EUR weakness. In the near future (including the next ECB press conference on December 12), I will therefore pay particular attention to which of the two camps will gain the upper hand.”

Friday's soft eurozone PMI releases – especially the drop in the services component – hit the short-end of the region's rate market hard and took EUR/USD to the lowest levels since 2022, ING’s FX analyst Chris Turner notes.  

Current bounce may stall in the 1.0500/0550 area

“The view here remains there is no fiscal calvary coming in the eurozone and that the only way to address the current malaise is for the European Central Bank to cut rates more quickly than usual. The market now prices 37bp of a 50bp ECB cut in December and short-dated US; eurozone spreads remain very wide at 190bp.” 

“Futher updates on eurozone business and consumer confidence are released by the European Commission on Thursday. Also in the eurozone this week will be Friday's flash release of November CPI, where core inflation is unhelpfully expected to creep a little higher.” 

“EUR/USD is having a decent bounce after what looked like an FX option barrier-triggered mini-collapse to 1.0335 on Friday. The trend very much remains bearish and we are wary of more extended EUR/USD losses into year-end despite supportive seasonal patterns. We suspect the coming weeks may be characterized by periods of shallow corrections and then marginal new lows. The current bounce may stall in the 1.0500/0550 area.”

With only one week to go before the elections, the Harris bounce in the polls is fading, Rabobank’s Senior US Strategist Philip Marey notes.

Donald Trump or Kamala Harris?

“A Trump presidency would likely lead to a universal tariff and even higher tariffs on China. With support from Congress, he would cut taxes, deregulate the economy and reduce immigration.”

“A Harris presidency would be an extension of Biden’s policies with targeted tariffs on China, reducing health care costs and trying to cut taxes for the middle class, while raising them for the wealthy and corporations. However, two new Harris-specific policy plans focus on stopping price gouging in the food industry and dealing with the housing market shortages.”

“Simulations with a macroeconometric model suggest that Trump’s universal tariff would lead to a rebound in inflation. This could stop the Fed’s cutting cycle in its tracks. In contrast, Harris’ policies would lead to a continued decline in inflation to the Fed’s 2% target and allow the Fed to continue its cutting cycle next year.”

The US Dollar accelerated its uptrend and traded at shouting distance from the area of three-month highs on the back of higher yields and the resumption of the “Trump trade” among market participants.

Here is what you need to know on Tuesday, October 22:

The US Dollar Index (DXY) climbed further and came at shouting distance from the key 104.00 barrier helped by rising US yields. The Richmond Fed Manufacturing Index is due along with the speech by the Fed’s Harker.

EUR/USD resumed its deep pullback and approached the 1.0800 region once again on Monday. All the attention will be on the ECB, as Lagarde, McCaul and Lane are all due to speak.

GBP/USD succumbed to the Dollar’s gains and broke below the key support at 1.3000 the figure. Public Sector Net Borrowing figures will be published followed by the speech by the BoE’s Bailey.

USD/JPY advanced to multi-week tops well north of the 150.00 hurdle following the firm performance of US and Japanese yields. Next on tap in Japan will be the weekly Foreign Bond Investment figures along with the preliminary Jibun Bank Manufacturing and Services Index on October 24.

AUD/USD deflated to six-week lows near 0.6650 on the back of usual concerns from China, the stronger Dollar and weaker commodity prices. The advanced Judo Bank Manufacturing and Services PMIs will be the next salient event in Oz on October 24.

Prices of WTI regained the smile and reversed six straight days of losses on Monday, this time reclaiming the area beyond the key $70.00 mark per barrel.

Prices of Gold rose to a record high around $2,740 mark per ounce troy in response to the stronger Greenback and rising US yields. Silver prices, on the flip side, rose past the $34.00 mark per ounce for the first time since November 2012, ending the day marginally on the upside.

Federal Reserve (Fed) Bank of San Francisco President Mary Daly noted on Tuesday that although the Fed has made significant progress on tamping down inflation while also keeping the US labor market within long-run averages, there's still a lot of progress to be done. The Fed policymaker also leaned into the current rate cut spread, noting that it was likely the Fed will only see one or two more rate cuts in 2024.

Key highlights

Federal Reserve Bank of San Francisco President Mary Daly said on Wednesday that she "fully" supported the Fed's half of a percentage-point interest-rate cut last month. Daly further stated that one or two more rate cuts this year are likely if the economy evolves as she expects, per Reuters.  

Key quotes

Market reaction 

The US Dollar Index (DXY) is trading 0.01% lower on the day at 102.90, as of writing.

The main event in the Central and Eastern Europe (CEE) region today is the meeting of the National Bank of Romania, ING’s FX strategist Frantisek Taborsky notes.

EUR/RON remains firmly anchored just below 5.00

“Our economists expect rates to remain unchanged at 6.50%, in line with expectations, but the survey is split. On one side is the rebounding credit market, wages and loose fiscal policy speaking against further rate cuts. On the other, inflation is lower than expected and the economy is surprising on the negative side.”

“The global picture is also mixed with the Fed cutting rates and the situation in the Middle East pushing up oil prices. FX forwards suggest a market on the dovish side for today's decision. However, it's hard to expect any reaction from the RON which remains firmly anchored just below 5.00 EUR/RON and we don't expect any changes here in the near term.”

“At least the front of the Romania government bond curve could see some support if the NBR continues to cut rates for the third straight time. On the other hand, in the bond space, the focus remains mainly on fiscal policy. Speculation yesterday of the Ministry of Finance's agreement with the European Commission on this year's deficit at 7.9% of GDP can hardly be taken as good news, given that it is more at the upper end of market expectations, implying further bond issuance this year.”

• USD/CAD falls slightly ahead of the Fed Powell’s speech.
• Investors look for fresh interest rate cues for the November meeting.
• The Canadian economy is estimated to have barely grown in July.

The USD/CAD pair edges lower to near 1.3465 in Thursday’s European session after a strong recovery on Wednesday. The Loonie asset faces a mild sell-off as the US Dollar (USD) struggles to extend recovery, with the US Dollar Index (DXY) facing pressure near 101.00.

The next move in the US Dollar will be guided by Fed Chair Jerome Powell’s speech at 13:20 GMT in which he is expected to provide fresh guidance on interest rates. In last week’s press conference after the policy decision of interest rate reduction by 50 basis points (bps) to 4.75%-5.00%, the comments from Jerome Powell suggested that the larger-than-usual rate cut will not be the new normal.

On the contrary, the probability of the Fed delivering another 50 bps interest rate cut in November is 61%, higher than 39% a week ago, according to the CME FedWatch tool.

Meanwhile, the Canadian Dollar (CAD) will be influenced by the monthly Gross Domestic Product (GDP) data for July, which will be published on Friday. Economists estimate the Canadian economy to have grown by 0.1% after remaining flat in June.

USD/CAD prints a fresh swing low near 1.3400 on a daily timeframe, suggesting a firm bearish trend. The Loonie asset weakens after slipping below the August 28 low of 1.3440. A declining 20-day Exponential Moving Average (EMA) near 1.3545 indicates more downside.

The 14-day Relative Strength Index delivers a range shift move into the 20.00-60.00 territory from 40.00-80.00, which suggests that pullbacks would be considered as selling opportunities by investors.

Going forward, a further correction by the major below the immediate support of 1.3400 would expose it to January 31 low of 1.3360 and June 9 low of 1.3340.

In an alternate scenario, a recovery move above the psychological support of 1.3500 would drive the asset towards April 5 low of 1.3540, followed by September 20 high of 1.3590.

USD/CAD daily chart

Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.

Key quotes

"Immigration is one of the things that has allowed unemployment rate to rise."

"Further declines in job openings will translate more directly into unemployment."

"My own sense is we are not going back to negative rates for long-term bonds; it feels neutral rate is higher than it was."

"It feels to me that neutral rate is probably significantly higher than it was pre-pandemic."

"Fed makes decisions based on its service to American people."

"Our decisions are never about politics or anything else."

"Our job is to support the economy on behalf of the American people."

"If we get it right, will benefit the American people."

Federal Reserve Chairman Jerome Powell explains the decision to cut the policy rate, federal funds rate, by 50 basis points to the range of 4.75%-5% after the September meeting and responds to questions in the post-meeting press conference.

Key quotes

"It is time to calibrate our policy to something that is more appropriate given progress on inflation and on employment."

"The direction of our process is toward a sense of neutral."

"We'll move as fast or as slow as we think appropriate."

"We left open size of rate cut as we entered blackout."

"Broad support for a 50 bps cut today."

"There is a dissent and a range of views but also a lot of common ground."

"There's no sense that the Committee feels it is in a rush."

"We have made a good strong start today on cuts."

"I am very pleased that we did 50 bps."

While the Fed’s guidance and policy decision tomorrow will signal whether the selloff in the USD over the past few sessions is overdone, the US election will set the scene for the greenback into year-end and through the start of the new year, Rabobank’s Senior FX Strategist Jane Foley notes.

The 1.12 level to be tough resistance for EUR/USD

“The inflation impulse is expected to be greater under a Trump presidency given his preference for more tariffs and his desire to make permanent most of the tax cuts he enacted during his first term. Looser fiscal conditions suggests that the Fed easing cycle could come to an abrupt halt next year.”

“Rabobank expects that a Harris election victory would allow for a more extended series of Fed rate cuts which would imply a softer profile for the greenback then under a Trump presidency. That said, the outlook for the USD crosses also depends on the relative performance of other currencies. It is hoped that this week’s BoJ policy meeting will offer some sense of the timing of further BoJ rate hikes.”

“In view of the contrasting BoJ and Fed policy directions, we continue to favour selling USD/JPY on rallies. By contrast the direction of interest rate policy at the ECB is the same as the Fed. Since it could be argued that a sharp rise in the value of the EUR vs. the USD could allow the ECB to step up the pace of its easing, we expect EUR/USD 1.12 to be tough resistance.”