The factors that drove the USD’s recovery in October are reversing.
First, the confidence in a Trump victory in the US Presidential elections on November 5 has waned. The outcome of the closely contested race remains uncertain, raising the potential for significant market volatility. News reports suggested that the Republicans could help former president Donald Trump overturn the election results if vice president Kamala Harris wins. Trump’s scheduled sentencing on November 26 for his 34 felony convictions could also sow confusion if he wins.
Hence, markets are hedging their “Trump Trade” bets. For example, the VIX Volatility Index is close to this month’s high above 20 again, and Bitcoin retreated to 69,114 yesterday after nearing its lifetime high of 73,798. The DXY Index has struggled to keep pace with rising US bond yields amid worries about US fiscal sustainability. USD/JPY was capped at 154 after Japan’s snap election on October 27 stripped the ruling LDP-Komeito coalition of its majority. However, the political resistance to the Bank of Japan’s rate hikes supported USD/JPY around 152.
Second, we see the Fed Funds Rate (FFR) declining by 25 bps to 4.50-4.75% at the FOMC meeting on November 7. US nonfarm payrolls were significantly weaker at 12k in October vs. the 100k consensus; September was revised to 223k from 254k. Fed Chair Jerome Powell will reiterate that further labour market weakness is unnecessary to lower inflation. With the economy and labour market in better balance vs. two years ago, amid low global energy prices, Powell will likely be confident about inflation returning to the 2% target next year. Hence, the Fed will keep the door open to lower interest rates towards neutral. Our view remains that the FFR will decline to 3% by 3Q25.
We also anticipate the Bank of England lowering its bank rate by 25 bps to 4.75% on November 7. CPI inflation fell to 1.7% YoY in September, below the 2% target for the first time since Covid. However, core inflation remained high at 3.2% in September. BOE Governor Andrew Bailey should address monetary policy in light of the controversial Budget announced on October 31. While the IMF backed Chancellor Rachel Reeve’s economic plan to boost public investment to drive growth, Moody’s warned that frequent changes to the fiscal rules could erode credibility. The Office for Budget Responsibility (OBR) reckoned the additional spending could provide a short-term lift to growth before crowding out business activity and investment and lifting inflation. Following its knee-jerk sell-off to 1.2844 on the announcement, GBP/USD has stabilized above 1.29 on expectations of cautious BOE rate adjustments.
Quote of the Day
“I am the president of the United States. I’m not the emperor of the United States.”
Barack Obama
November 4 in history
In 2008, Barack Obama became the first person of biracial or African-American descent to be elected as President of the United States.
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