EUROPEAN FX UPDATE: USD firmer in the run-up to FOMC. AUD leads as hot CPI dashes RBA rate cut hopes

USD: DXY +0.3%; 98.98

• DXY has kicked off Fed day on the front foot, outmuscling most of its major counterparts except AUD. For today's announcement, the FOMC is widely expected to cut rates by 25bps to 3.75-4.00%. Within the rate decision, participants will be eyeing any dissenters, with Governor Miran expected to vote for a 50bps reduction. Elsewhere, markets are bracing for a potential announcement that the Fed will bring an end to its balance sheet run-off or at least signal that one is forthcoming (see FI section for further details). At the follow-up press conference, markets will be looking to see if Powell leaves the door open for further easing. Given the recent cool inflation print and lack of other official data releases, it is unlikely that the Chair will challenge market pricing for another cut by the end of the year. Note, for 2026, assuming the Fed cuts by 50bps this year, markets see another 65bps of loosening by Dec'26. Elsewhere, focus is on the positive mood music ahead of the Trump-Xi meeting tomorrow with the latest reporting suggesting that a reduction in fentanyl-related tariffs could be on the cards, whilst sources suggest China has resumed purchases of US soybeans. DXY has just about eclipsed yesterday's best @ 98.94, hitting the 99.0 mark. The next upside target comes via the 24th October high @ 99.10.

EUR: EUR/USD -0.2%; 1.1621

• EUR is weaker vs. the broadly firmer USD but stronger vs. GBP (see GBP section). Focus in the Eurozone this week will be on tomorrow's ECB policy announcement. However, expectations are firmly on the ECB standing pat on rates with policymakers of the view that policy is in a "good place". Given the lack of material economic updates since the prior meeting and no accompanying macro projections, there is unlikely to be much in the way of a signalling effect from the meeting. As such, near-term direction for the pair may be driven more by the USD leg of the equation. As a note of caution, tomorrow's flash German GDP release could see the core EZ nation enter into a technical recession. EUR/USD has delved as low as 1.1620 but is managing to hold above the WTD trough @ 1.1617.

JPY: USD/JPY +0.1%; 152.32

• JPY is on the backfoot vs. the USD with USD/JPY back on a 152 handle in the run-up to the BoJ policy announcement. Markets assign a circa 82% chance of an unchanged rate with the recent appointment of Abe protege, Takaichi, as PM seen as likely delaying the BoJ’s policy normalisation efforts. Nonetheless, the prospects of a hike in the near-term are not off the table with one of Takaichi’s closest advisers recently noting that Takaichi will likely tolerate another 25bps interest rate hike by January next year if the economy is in firm shape, but caveated that such a move would be on condition the BoJ maintains relatively loose monetary policy with no further rate hikes likely until 2027. Note, the next 25bps hike is not fully priced until March 2026. Elsewhere, reports suggest that PM Takaichi and Chinese President Xi are due to meet on Friday. USD/JPY has ventured as high as 152.54 vs. yesterday's peak @ 152.82.

GBP: GBP/USD -0.5%; 1.3207

• GBP is once again on the backfoot vs. the USD and EUR in an extension of yesterday's underperformance. The pound began faltering yesterday on account of ongoing angst ahead of the UK budget and data from the BRC that food inflation in October declined to 3.7% from 4.2%. On the former, concerns over next month's fiscal event were underscored by an FT report that the UK OBR is expected to cut its trend productivity growth forecast by about 0.3%, which is said to threaten a GBP 20bln hit to UK public finances. Since yesterday, we have seen the likes of Goldman Sachs now expect a 25bps reduction next month (prev. call was for unchanged) and forecasts quarterly 25bps reductions until a terminal rate of 3% is reached in July. As such, traders see the path of least resistance to keep on selling the pound. Accordingly, EUR/GBP briefly made its way onto a 0.88 handle for the first time since May'23, whilst Cable is eyeing a test of 1.32 to the downside.

Antipodeans: AUD/USD +0.3%; 0.6599. NZD/USD U/C; 0.6598

• AUD is the standout outperformer across the majors after firmer-than-expected CPI data, which added to the spoils from yesterday's outperformance that had been facilitated by US-China trade optimism. The data has spurred the likes of Goldman Sachs and CBA to drop their rate cut calls. Odds of a November cut have slipped to 8% from circa 42% pre-release. However, Oxford Economics cautions that "the strength in today’s inflation data is largely temporary...we expect inflation to ease meaningfully over the year ahead". The next potential inflection point for AUD could come via tomorrow's meeting between US President Trump and Chinese President Xi, as well as flash Chinese PMI metrics on Friday. AUD/USD briefly made its way onto a 0.66 handle for the first time since October 9th, topping out @ 0.6617. NZD/USD is steady with the pair running out of steam ahead of the 0.58 mark.

CAD: USD/CAD U/C; 1.3942

• CAD steady vs. the USD in the run-up to the BoC rate decision, which is widely expected to lower rate by 25bps to 2.25%; markets assign a circa 84% chance of such an outcome. The announcement comes amid the backdrop of a strong jobs report and hot inflation. However, the overriding factor for markets is the deterioration in Canada-US trade relations after the US recently raised tariffs on Canada by 10%. The meeting will also see the latest MPR, and the BoC may return to offering a baseline forecast. Additionally, any updates to the neutral rate estimate will also be eyed with rates now below the midpoint of the BoC's neutral rate range. If the BoC cuts by 25bps as expected, it takes rates to the lower end of the BoC's neutral rate estimate. USD/CAD is currently sandwiched between its 200 and 50DMAs at 1.3952 and 1.3897, respectively.

29 Oct 2025 - 09:55- ForexData- Source: Newsquawk