The dollar has retained very good momentum in the aftermath of the FOMC announcement on Wednesday, with markets continuing to push their Fed peak rate expectations higher. Fed Funds for the March 2023 meeting are currently trading in the 5.10/5.20% region, a clear indication that markets have not bought into any dovish pivot narrative. This is particularly relevant for FX given the divergence between the Fed and other major central banks. Today, the focus will shift back to data as US October payrolls are released. We expect today's release to leave markets still searching for a higher Fed terminal rate, ultimately keeping the dollar bid.
The CAD is holding tight onto its second place in the YTD G10 FX ranking, as USD/CAD bounced back to 1.38 in the aftermath of the FOMC and wider US- Canada rate differentials. Today both countries are due to publish their latest jobs report for October, which may not impact the near-term course of USD/CAD barring any significant divergence. In Canada, the economy is expected to have registered further gains in employment, while wage growth may have ticked a tad lower last month. In the absence of any surprises, the BoC should not fall much further behind the Fed in the eyes of the markets with monetary policy, which should in turn leave USD/CAD consolidating within the 1.35/1.40 range set last month.
EUR/USD remains primarily a function of dollar moves, and today's US payrolls release should continue to put pressure on the pair. Having now moved back to the trading ranges seen before the late-October correction we think markets have switched back to a more structurally bearish tone on EUR/USD, and a return to 0.9500 is likely in the near term. Domestically, markets will keep an eye on ECB president Christine Lagarde's comments this morning. With markets pricing in a 60bp of tightening by the ECB in December. From an FX perspective, the implications for the euro have been quite limited, and doubt this will change drastically in the very near term.
While the BoE hiked by 75bp, it seemed to tweak the policy message to the dovish side, triggering a GBP reaction (-1.5% vs USD). The BoE pushed back against what markets were previously pricing in terms of tightening (i.e. a 5% peak rate), adding in its forecasts that following the market-implied rate path could cause a three percentage point economic contraction over several quarters and inflation at zero in 2025. The bottom line is that the BoE is essentially shutting the door to another 75bp, and we expect a 50bp hike in December. Today, BoE chief economist Huw Pill will deliver some remarks, but there are no other key events to monitor in the UK. Risks are skewed towards a re-test of 1.1000 over the next few days, with today's US payrolls possibly adding pressure on the pair.
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