Forex Today: Major pairs remain rangebound after Fed as focus turns to ECB and key US data

Thursday, 29 October: the key developments for markets

The first estimate of US third-quarter Gross Domestic Product (GDP) growth and September’s Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation measure, are due on Thursday, alongside the European Central Bank’s (ECB) policy decision. Major currency pairs remain without a clear direction after the Fed’s policy announcements and Chair Kevin Warsh’s remarks on the outlook drew little market response.

As expected, the Fed maintained its policy rate at 3.75%–4.00%. Chair Warsh used the subsequent press conference to reaffirm the commitment to achieving price stability, without indicating that rates would rise in December. Even so, the CME FedWatch Tool now puts the market-implied probability of a 25 basis points interest-rate increase at the year’s final meeting at about 83%, up from about 80% ahead of the decision. The US Dollar (USD) Index is slightly firmer on the day above 102.20, following Wednesday’s 0.2% decline, while the benchmark 10-year US Treasury bond yield remains close to 5%. US stock index futures present a mixed picture: Nasdaq Futures and S&P are down 1.2% and 0.4%, respectively, whereas Dow Futures are about 0.4% higher.

A 7/10 FXS Speechtracker reading, matching the historical average, underscored the firmly hawkish tone of Fed Chair Warsh’s press conference and his continued resolve on inflation. His statements that “ensuring price stability is not about a fixed date on a calendar” and “no ifs and or buts, we will deliver price stability” conveyed an uncompromising approach guided by the data. References to “new monetary medicine,” September’s reduction in accommodation and improving inflation expectations reinforced that message.

Following the Fed event, the FXS Fed Sentiment Index climbed by +14.39 points to 141.89, leaving it well above the neutral threshold of 100 and firmly in hawkish territory. The sharp rise suggests markets are absorbing Warsh’s message that monetary tightening is taking effect, inflation expectations are “going the right way,” and a “soft” inflation target will not be tolerated. Such conditions typically favour the Dollar while weighing on risk-sensitive currencies.

Dollar retains support after Fed pause, but OCBC sees little room for sustained gains

OCBC analysts note that Fed policymaker Kevin Warsh “pushed back against the idea that the economy is running too hot,” even “despite a strong economy and sticky inflation,” and stressed that “incoming data will determine the next move.” For OCBC, the message is that “Warsh remains willing, but not eager, to tighten further,” with the bank maintaining that it “continue[s] to expect a second and final 25bp hike in December.”

Although the analysts believe “the risk of further Fed tightening should keep the USD supported,” they also “see limited scope for a sustained dollar rally unless underlying inflation continues to surprise to the upside.” As OCBC notes, “after the Fed pause, the Bank of Canada hike and the RBNZ surprise hold, attention now turns to the ECB,” while shifts in the global policy landscape are set to influence the Dollar and Euro outlook over the coming weeks.

With the ECB expected to hold its key rates steady, President Christine Lagarde’s guidance on policy could affect the Euro during the second half of the day, particularly given fiscal uncertainty in France. At the time of writing, EUR/USD stood close to 1.1140, down about 0.15% on the day.

USD/CAD fell about 0.4% on Wednesday following the Bank of Canada’s (BoC) decision to increase its policy rate by 25 bps to 2.5%. According to BoC Governor Tiff Macklem, rates have no pre-determined path; he also said that, despite the increase, the policy rate remains low enough not to constrain growth. In early Thursday trading, USD/CAD is consolidating around 1.4000.

GBP/USD ended Wednesday with a modest gain, bringing a three-day run of losses to an end. Thursday’s European session sees the pair trading sideways above 1.3300.

USD/JPY has steadied below 158.00 on Thursday after recording a slight decline on Wednesday.

Gold remains under pressure in early Thursday trading, posting losses below $4,050 following a virtually flat close on Wednesday.