Outlook for the Week of October 21-25

Key points to watch out for:

• Bank of Canada meets; a more than 50 basis point cut is possible.
• October forward PMI indices will set the mood amid growth concerns.
• A relatively quiet week with second-tier data releases

Bank of Canada Likely to Cut Rates by Half a Point

Estimates that the Bank of Canada will cut rates by 50 basis points at its October meeting have increased following the latest CPI data. However, markets are not entirely convinced that there will be a significant move, so some uncertainty remains ahead of the Canadian central bank’s decision on Wednesday, October 23.

At first glance, Canada’s economy does not appear to be in good shape. Growth has been sluggish since late 2022, and the unemployment rate has risen from a post-pandemic low of 4.8% to about 6.5%. More significantly, the Bank of Canada has made considerable progress in reducing inflation, which fell to 1.6% in September—the lowest level recorded in three and a half years.

Governor Tiff Macklem stressed at the last meeting that policymakers are “ready to go one step further.” In addition, the BoC’s own survey indicates that businesses remain fairly pessimistic amid weak demand.

However, there are signs that the worst may be over, as GDP growth has improved this year, and employment is rising again after two months of declines. Some investors were also disappointed that underlying measures of inflation remained flat in September. All of this could limit the scope for further 50 basis point cuts, even if policymakers endorse one at their October meeting.

For the Canadian dollar, any hawkish news could provide a much-needed boost, given that it has depreciated by about 2.6% against the U.S. dollar since its September peak. A 50 basis point cut is likely, though it is currently estimated at 75%. Consequently, the Canadian dollar could come under pressure if these estimates are confirmed.

However, investors will still be watching for any signs of further cuts. Should Macklem leave the door open for additional 50 basis point cuts, the Canadian dollar could face a deeper downtrend. On the other hand, if more positive news emerges regarding the outlook, investors may anticipate fewer rate cuts in the coming months, which could support the Canadian dollar.

Will Eurozone PMIs Worsen the Euro’s Woes?

Last month’s Eurozone PMI reports were so weak that the European Central Bank changed its stance on a potential rate cut in October after previously signaling otherwise in September. The ECB has already cut rates three times this year by a total of about 75 basis points, and further easing looms as inflation and growth risks tilt to the downside. Should the October PMI figures disappoint as well, investors may strengthen their bets on further rate cuts in the coming months.

High interest rates have likely taken a toll on the eurozone economy. Although companies are beginning to benefit from lower borrowing costs, the bloc’s largest economies—Germany and France—are facing other challenges. German manufacturers are struggling with global competitiveness, exacerbated by weak demand from China, while political turmoil in France has created uncertainty for businesses.

On the bright side, German exports to China may benefit from the growth support measures recently announced by Beijing, and the political standoff in France appears to have eased for now.

This could be a positive sign for the outlook, but Europe’s current situation remains worrisome for policymakers. Unless the PMI indices due on Thursday, October 24, show signs of improving business confidence, the euro is likely to continue its downward trajectory. Traders will also be watching Germany’s Ifo Business Climate figures due on Friday, October 25.

Pound Likely to be Supported by UK PMIs

Recent economic indicators in the U.K. have been mixed, though the inflation picture has become clearer. Headline CPI fell below the Bank of England’s 2% target last month, and services CPI dropped significantly. Even if growth picks up again, it is almost certain that the BoE will cut rates again.

However, the strength of the economy will dictate the pace of rate cuts. This is crucial for sterling, as the BoE may not need to cut rates as frequently as other central banks if growth remains strong, which could strengthen sterling crosses over the medium term.

Both the services and manufacturing PMIs declined slightly in September but remained above 50. Any improvement in October could see sterling recover some of its recent losses on Thursday, October 24. However, the rally may be limited, as the BoE is expected to cut interest rates on November 7. Traders will closely watch Governor Bailey’s statements, as he has several scheduled appearances this week.

Another Quiet Week in the United States

In the U.S., preliminary PMI indices will be closely monitored. Investors will look to S&P Global’s survey data for updates on employment conditions and price pressures in the manufacturing and services sectors.

The Fed is expected to cut rates again in 2024, although after a recent string of positive data, some investors are not only ruling out a 50 basis point cut but also a 25 basis point reduction for November and December. If the PMIs extend the streak of positive surprises, the U.S. dollar could reach new highs as investors further reduce their rate cut expectations.

However, with no major data releases until the last week of October, market movements may be limited as traders shift their focus to corporate earnings. Other key data points include existing home sales on Wednesday, October 23, new home sales on Thursday, October 24, and durable goods orders on Friday, October 25.

Conclusion

For the rest of the week, Tokyo’s CPI figures, due on Friday, October 25, will be the only significant data from Japan. In Australia, traders will focus on PMI figures due on Thursday, October 24. The Australian dollar could benefit from positive PMI data, particularly following strong employment figures from September.

China will also remain in focus, as the People’s Bank of China is set to announce interest rate decisions on Monday and may release more stimulus measures aimed at supporting the housing market and consumers. Any positive developments could help sustain risk sentiment if markets struggle to find direction.