The FX markets had a wild day on Monday. The dollar was generally firmer and sterling was sinking sharply. G7 FX volatility has returned to March 2020-high levels. The story continues in the same way. The goal of central bankers is still solely to control inflation, even at the expense of a recession. The Fed's economic forecasts from the previous week, in our opinion, will take some time to fully register with the market. The Fed predicts that the US unemployment rate would increase from its current level of 3.7% to 4.4% by the end of next year, but will continue to raise rates to 4.50/4.75% in the meantime. The emphasis for today's session will be on Fed speakers and secondary data.
CAD - Canadian Dollar
Yesterday, the US dollar's range against the Canadian dollar was extremely wide (CAD1.3560-CAD1.3810). Today, a more constrained range and calm tone have taken hold. The range of the dollar has been restricted to roughly CAD1.3640 and CAD1.3745. The bottom was hit in late Asian trading, and in Europe, the US dollar rose back above 1.3700. Look for the intraday momentum indicators to get stretched and the short-term support level of 1.3720 to hold.
EUR - Euro
A fresh yearly low for the EUR/USD was reached close to 0.9550. Looking at a EUR/USD chart, it appears that since the summer of 2021, there has largely been one way traffic. The Fed has managed to solidify its concern about inflation while hurting Europe's growth prospects. The Fed changed from its super-dovish experiment with average inflation targeting to more conventional tightening. Expect little change in the EUR/USD in the medium term until the Fed's task is completed, which doesn't appear to be happening until 1Q23 at the earliest. Expect intraday EUR/USD gains to once again halt near the 0.9700 area, and we doubt that much aggressive ECB talk will change much of anything.
GBP - British Pound
It is normally difficult for a major reserve currency to maintain high levels of volatility for extended periods of time, but the GBP may likely strive to defy this standard. By a) the UK Treasury pledging a proper budget assessment on November 23 and b) the BoE promising to take into consideration all market movements when it decides on monetary policy on November 3, UK authorities have attempted to buy time for the pound. However, six to nine weeks are a long time in the foreign exchange market, investors were disappointed about the lack of an emergency rate hike from the BoE. The Pound is exposed since a policy reaction won't come until November. FX markets feel like the dollar is going into early 1980s over-drive territory and barring a stark reversal in hawkish Fed expectations it is likely that the GBP/USD will retest 1.0350 over the next month
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