The two factors we highlighted that would support the EUR are coming in.
First, the silver lining for France’s Budget 2026 has emerged. Re-appointed French Prime Minister Sebastien Lecornu has submitted Budget 2026 on October 14, meeting the deadline to kick off a 70-day debate in the National Assembly. To ensure the bill’s passage by the end of 2025, Lecornu has secured the support of the Socialist Party, which will hopefully help his government survive another no-confidence vote by the far right and radical left parties later in the week. To ensure the continued support of the Socialists, Lecornu has proposed to suspend this autumn President Emmanuel Macron’s 2023 pension reform plan until January 2028 or after the 2027 presidential election.
Second, our call for the US Federal Reserve to shift from data-dependency to risk management mode is materialising. Speaking at the NABE Annual Meeting overnight, Fed Chair Jerome Powell said he would look past the recent rise in inflation and keep reducing interest rates. Powell noted that the downside risks to the labour market have increased, not helped by the data lapses from the US government shutdown. Against this background, Powell observed that liquidity conditions were gradually tightening, which may warrant the Fed to stop shrinking the balance sheet in the months ahead. Powell’s comments have relegated the significance of the US CPI data release on October 24. The futures market has fully priced 25-bps cuts at this year’s two final FOMC meetings and reinstated three additional cuts in 2026.
The above two developments helped EUR/USD to bounce off last Thursday’s low around 1.1540. To break above 1.1630-1.1650 resistance and extend the EUR’s recovery, Lecornu must first survive the no-confidence vote on October 16. Unlike the Fed rate cut in mid-September, Powell is likely to be less hesitant about future cuts after easing on October 29. The Fed will enter a blackout period next week.
Admittedly, the increase in US-China trade tensions is generating on-off market volatility, especially for USD/JPY. However, markets have stayed sanguine because of hopes for a Xi-Trump meeting at the APEC Economic Leaders’ Meeting (October 31-November 1). In Japan, lawmakers will be gathering on October 21 to select the next prime minister. It remains to be seen if Sanae Takaichi can become Japan’s first female prime minister. Although she secured victory in the Liberal Democratic Party leadership race, Komeito’s withdrawal from the coalition has left the LDP leading a minority government. Her odds of winning the Diet vote will reduce dramatically if the opposition unites behind a challenger from the Democratic Party for People. While the OIS market is not pricing in a rate hike by the Bank of Japan at the October 30 meeting, it has increased the odds of a BOJ hike at the December 19 meeting on Takaichi’s weakened leadership credentials.
Quote of the Day
“If I were two-faced, would I be wearing this one?”
Abraham Lincoln
October 15 in history
In 1860, 11-year-old Grace Bedell wrote to Abraham Lincoln telling him to grow a beard.
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