The USD continues to hold on to gains across the entire FX spectrum and more volatility is expected to close the week and early next week ahead of the FOMC interest rate decision. Today, the hot story will be US price data. We get to see the 3Q22 Employment Cost Index (ECI). This is an influential number for the Fed and its spike to 1.4% quarter-on-quarter in the first quarter certainly contributed to this year's hawkish Fed. Consensus expects the 3Q ECI to soften to the 1.2% QoQ area in today's release. Any upside surprise could push the pricing of the Fed terminal rate (now 4.75% and off a recent high at 5.00%) higher. This would be dollar positive.
The greenback dipped below 1.35 yesterday, a new low for the month. However, it settled higher on the day and is back above 1.36 in Europe this morning. A move above the 1.3635 area could see 1.3675-1.3720. The main driver for the direction of the loonie continues to be the broader risk appetite and the performance of US stocks. Canada reports August GDP this morning, however, it is unlikely to be much of a market-mover after the central bank meeting earlier this week. Observe the USD/CAD trends.
The ECB hiked rates by 75bp yesterday, but in some ways, it could have been described as a dovish hike. Interest rate markets took note of the reference to 'substantial progress being made in withdrawing monetary accommodation' and took 30bp off the pricing of the terminal ECB rate, which is now priced at 2.50%. For today, EUR/USD might bounce around a little as ECB hawks brief the media that the central bank's statement was not quite as dovish as the market has interpreted. But we think the dollar should stay supported into next week's FOMC meeting and would favour EUR/USD edging down today to the 0.9910/20 area.
GBP will be settling into ranges ahead of next week's event risks in the form of both the Fed and Bank of England (BoE) rate meetings. The pricing for next week's BoE rate meeting is starting to drift below a 75bp hike to 3.00%. Note that at the height of the fiscal fiasco, the market had briefly priced the bank rate being taken to 3.90% at next week's meeting. We think the chances of a 50bp hike from the BoE are greater than the market currently prices – and that is a sterling negative.
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