Outlook for the Week of October 07-11

Key points to watch out for:

• U.S. CPI data to guide Fed rate cut bets and the dollar
• RBNZ expected to cut interest rates by 50 basis points
• Sterling awaits monthly GDP figures
• Canadian employment and Bank of Canada business survey in focus

Dollar Rallies on Safe-Haven Flows and Positive Data

The U.S. dollar saw a sharp rally last week after Federal Reserve Chairman Jerome Powell hinted at continuing rate hikes of 0.25%, bolstering confidence in the economy.This rally was further supported by safe-haven flows triggered by Iran’s missile strikes on Israel, a response to Israeli actions against its allies, including Hezbollah in Lebanon.

Moreover, strong economic indicators, such as the ADP employment report and ISM non-manufacturing PMI, prompted investors to reassess their expectations for future rate hikes. Current market sentiment now reflects only a 35% chance of a 50-basis-point increase in November, with approximately 67 basis points of hikes anticipated by year-end. This shift highlights the intricate balance between geopolitical events and economic data in shaping market dynamics.

Economic Calendar in Focus

Barring further escalation in the Middle East, traders of the U.S. dollar are likely to focus on the economic calendar. The minutes from the latest FOMC decision will be released on Wednesday, October 9. Since the dot plot indicated a 50-basis-point rate hike by year-end, and most policymakers, including Powell, supported quarter-point hikes, it’s unlikely the minutes will have a significant market impact.

Attention will shift to the U.S. CPI data for September, to be released on Thursday, October 10. Preliminary global PMIs from S&P show that prices for goods and services have risen at their fastest pace in six months. While the ISM manufacturing survey showed a decline, the non-manufacturing report confirmed the idea of accelerating price pressures. This suggests upside risks for Thursday’s data, with a particular focus on core CPI. The overall index may moderate slightly, as the year-over-year change in WTI crude oil moved back into negative territory during September.

If the data show inflation tightness, investors may grow more confident that the Fed will proceed with quarter-point hikes in both November and December. This could further strengthen the dollar.

RBNZ Rate Decision

In New Zealand, the New Zealand dollar benefited from China’s recent bold stimulus measures aimed at reviving economic activity. However, the latest wave of risk aversion and the dollar’s recovery have signaled a pullback.

At their last meeting on August 14, RBNZ policy makers cut interest rates by 25 basis points, signaling more cuts ahead as inflation remained near the midpoint of the Bank’s 1% to 3% target range. Since then, investors have adopted a more aggressive stance, expecting over 30 basis points of cuts in October.

Recent data has shown a larger-than-expected decline in retail sales in Q2, while the GDP rate, although better than expected, still indicates contraction. Investors now anticipate a possible 50-basis-point rate cut from the Reserve Bank of New Zealand this week and another 50 basis points in November. This raises the potential for upside in the New Zealand dollar, especially if the RBNZ opts for a 50-basis-point cut or signals sharper easing measures. However, if only 25 basis points are cut, the New Zealand dollar may consolidate and resume its uptrend.

Will Data Support the Pound?

Among major currencies, the pound has been the strongest performer this year. However, it took a hit last week after Bank of England Governor Andrew Bailey hinted at a more aggressive approach to rate cuts if inflation continues to rise. Markets are now anticipating a quarter-point cut in November, with a 65% chance of another cut in December.

Sterling’s next test comes with the August monthly GDP data due on Friday, October 4, along with industrial production and manufacturing indices, as well as further statements from Governor Bailey. Additionally, the minutes from the Bank of Canada’s latest policy decision will be released on Tuesday, October 8, alongside Canadian employment data and a business estimates survey that will attract attention as investors assess the Bank of Canada’s next move.

Conclusion

Looking ahead, the release of the minutes from the Bank of Canada’s latest policy decision on Tuesday, October 8, will be pivotal. Coupled with the Canadian employment data and a business estimates survey, these updates will provide valuable insights for investors as they evaluate the Bank of Canada’s potential strategies moving forward.