FX Daily: Navigating Data Dependency in the Currency Markets
The FX markets are currently experiencing a period of indecision, with the Federal Reserve's (Fed) uncertain stance on a December rate cut decision casting a spotlight on data dependency. This week's market dynamics are characterized by a delicate balance between data-driven volatility and the potential for heightened USD sensitivity to labor indicators.
USD: A Wait-and-See Approach
The anticipation surrounding the December Fed rate cut decision has intensified, with Chair Powell's press conference and FOMC member remarks providing valuable insights. The market has already responded with a 7bp hawkish adjustment in the December Fed Funds futures contract, but with 16bp still priced in, a cut remains a baseline expectation. The current market sentiment leans towards a dovish Fed and a bearish USD, but the risk landscape is now more balanced.
The recent Fed commentary has indicated a reduced conviction in a preset easing path, suggesting a greater reliance on data. December has been dubbed a 'live meeting' by the dovish-leaning Lisa Cook, while Mary Daly emphasized the need for an 'open mind'. However, the challenge arises from the government shutdown disrupting the usual data release schedule, which could lead to heightened market volatility and directionless trading.
EUR: ECB Unity Amidst Policy Narrative
The European Central Bank (ECB) speakers' post-meeting statements have offered limited new insights into the policy narrative. The Governing Council maintains a unified stance on rates, and substantial data surprises are required to create divisions among policymakers. While the ECB may consider further rate cuts, the current risks are not high, and the easing cycle is expected to conclude.
Despite the hawkish repricing in the USD curve, the EUR/USD drop appears excessive. Our short-term fair value model indicates a 1% undervaluation, and with balanced positioning, the pair can experience rapid rallies in response to poor US jobs market news.
The outlook for EUR/USD remains optimistic, with a potential rally towards 1.18-1.20 by year-end. However, until US data signals a rebound, other bullish drivers are limited.
CAD: Budgetary Support for the Canadian Dollar
Canada's budget announcement today is expected to introduce fiscally expansionary measures to support the tariff-hit economy. While the bar for debt sustainability concerns is high, bold fiscal spending could positively impact the CAD as the risks of further Bank of Canada rate cuts diminish.
The focus should remain on data, particularly inflation figures. If these figures undershoot expectations, the case for an early 2026 rate cut strengthens. Canada's jobs figures for October will also be closely watched, with an eye on the unemployment rate, where further increases from the current 7.1% could fuel dovish bets.
USD/CAD is anticipated to fluctuate around 1.40 in November, followed by a downward trend in December as the USD weakens.
CEE: A Busy Week Ahead
The Central and Eastern European (CEE) region is gearing up for a busy second half of the week, with key economic indicators and central bank meetings on the horizon. Yesterday's PMI data revealed a mixed picture, with lower-than-expected results in the Czech Republic, while Poland and Hungary surprised with higher-than-expected readings.
Inflation in Turkey returned to a declining trajectory, aligning with market expectations. The annual inflation rate is projected to reach around 32% by the end of 2025, decelerating to approximately 22% in the following year, surpassing the CBT's interim target of 16%.
The October data supports another rate cut in December, with the size of the cut contingent on November inflation. With a projected 100bp cut, the policy rate is expected to reach 38.5% by the end of the year, maintaining TRY's stable depreciating path and supporting CBT FX policy.
Today's calendar is relatively quiet, but the CEE currencies have started the week positively, with gains for the CZK and HUF. EUR/CZK remains within a tight range, while EUR/HUF tested new lows, indicating market acceptance of current levels despite weaker data and fiscal headlines. The market is also pricing in potential NBH rate cuts at the front end of the curve, influenced by HUF strength and anti-inflationary pressures.
Chris Turner
