Forex News
Royal Bank of Canada’s (RBC) Claire Fan highlights that the Q3 Canadian Business Outlook Survey underscores a difficult growth-inflation trade-off for the Bank of Canada (BoC) ahead of its next decision. While firm conditions improved into August, sentiment weakened after Canada-U.S. trade talks collapsed, with inflation expectations rising. RBC still expects no rate hikes until 2027 but notes risks skewed toward earlier moves.
BoC weighs fragile growth against inflation
"The Q3 Business Outlook Survey highlights the increasingly contentious growth-inflation trade-off confronting the Bank of Canada ahead of its upcoming policy decision."
"Odds for an October BoC rate hike rose significantly over the weekend following Governor Macklem's hawkish comments."
"But this morning's September CPI data showed core inflation measures averaging 1.9%, while the separate consumer survey suggested weaker spending intentions ahead."
"We continue to see fragile economic recovery as the biggest counterweight to heitened inflation risks, and expect caution from the BoC, especially when rising bond yields are already tightening financial conditions and raising borrowing costs for businesses and households."
"Risks to our base case forecast of no rate hikes until 2027 are tilted toward earlier moves – including potentially as early as next week’s Decision."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Megan Greene, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), said on Tuesday that she is concerned “over [the] BoE estimate of target-consistent pay growth,” and added that more wage disinflation is needed to meet the Consumer Price Index (CPI) target.
Greene is worried that the monetary policy stance “is not restrictive enough,” and added that “inflation expectations are anchored above norms.”
Key highlights:
Have concerns over BoE estimate of target-consistent pay growth
Wage growth of 3% consistent with 2% inflation
Need more wage disinflation to meet CPI target
People notice inflation when it is above 3%
Will continue to have a lot of supply shocks
Need to worry that stance is not restrictive enough
Inflation expectations are anchored above norms
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
MUFG’s Michael Wan notes China’s Q3 GDP growth firmed to 4.5% year-on-year, slightly above consensus, with September industrial production accelerating and fixed asset investment contractions narrowing. He highlights that stronger production keeps the annual growth target within reach but domestic demand and property investment remain uneven, which is crucial for assessing the sustainability of support for the Chinese Yuan.
Growth improves but demand uneven
"China’s economy gained momentum in Q3, led by stronger industrial production, although domestic demand remained uneven. GDP growth rose to 4.5%yoy from 4.3%yoy, slightly above consensus of 4.4%yoy, leaving growth at 4.6%yoy YTD. September industrial production accelerated to 5.5%yoy, while the monthly contraction in fixed asset investment narrowed after four months of double-digit declines."
"Stronger production has yet to translate into a convincing recovery in household demand or property investment. Retail sales improved to 1.1%yoy from 0.4%yoy, greatly exceeding the 0.5%yoy estimate, with it benefiting from the Mid-Autumn Festival falling in September."
"The improvement in production and narrower monthly investment contraction helped keep the annual GDP target within reach. For CNY, firmer activity provides a more supportive domestic backdrop, although the composition of growth remains important in assessing whether this improvement can be sustained."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
The US Dollar (USD) has further extended its corrective move on Tuesday, at some point easing to three-week lows, as investors continued to assess hopes of a potential US-Iran agreement, as per still-unconfirmed news.
The US Dollar Index (DXY) has retreated for yet another day, briefly revisiting the 101.50 region, or three-week troughs, always on the back of a firm improvement in the risk-associated universe. The usual MBA Mortgage Applications are due next, followed by the EIA’s weekly report on US crude oil stockpiles.
EUR/USD has added to the current rebound, although the bull run faltered around 1.1260. Next on the domestic calendar will be the flash Consumer Confidence in the euro area on Thursday.
GBP/USD has gathered extra steam, advancing to five-week highs just past 1.3400. The release of the key Inflation Rate takes centre stage across the Channel as well as Public Sector Net Borrowing figures.
USD/JPY has kept its sidelined theme well in place, this time trading on the back foot and returning to the low 158.00s. The Balance of Trade results will be the salient event on the Japanese calendar.
AUD/USD has clinched its third consecutive day of gains, finally challenging the key 0.7000 threshold. Next on the Australian docket will be the advanced S&P Global Manufacturing and Services PMIs on October 23.
Front-month West Texas Intermediate (WTI) futures have come under fresh downside pressure despite hitting tops past the psychological $100.00 mark per barrel earlier in the day. Hopes of an agreement to end the Middle East crisis appear to have dented the recent strong upside traction in the commodity.
Gold has built on the previous weakness, easing to the boundaries of the $4,100 mark per troy ounce on Tuesday. The precious metal’s retracement has come despite the weaker US Dollar and mostly declining US Treasury yields across the board.
Commerzbank’s Dr. Vincent Stamer analyzes Euro area inflation, highlighting that high energy costs are already feeding into goods and services prices. The bank’s Quant Model projects headline inflation near 4% in coming months and core inflation rising above 3% over the next year. This profile suggests the European Central Bank may need to revise forecasts and raise interest rates again.
Energy-driven core inflation and ECB outlook
"Core inflation in the euro area is currently rising only slowly. However, a closer look at the inflation details shows that high energy prices are already pushing up the prices of goods and services. Next year, this indirect effect is likely to intensify noticeably, causing the core rate to rise further."
"Our Quant Model forecasts a gradual rise in the core rate to over 3% for the next twelve months. In this case, the ECB would have to revise its forecasts upward again and is likely to raise key interest rates once more."
"As in recent months, the model – using data as of October 16 – forecasts an inflation rate of just under 4% for the coming months. Inflation is not expected to decline again until spring, due to base effects and lower oil prices."
"According to our forecasts, core inflation is expected to rise from its current level of 2.5% to over 3% by the fall of next year. This is because companies have been paying high energy prices for more than half a year and are now increasingly passing these costs on."
"Based on our current forecasts, the ECB is likely to raise its expectations again in December. This supports our expectation of an ECB interest rate hike in December."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- AUD/USD gains as a softer US Dollar and hawkish RBA stance support the Australian Dollar.
- A potential double bottom suggests buyers are beginning to regain ground.
- Momentum improves, but the pair remains below key daily moving averages.
AUD/USD edges higher on Tuesday, extending its gains for the third consecutive day, supported by a pullback in the US Dollar (USD) from the 18-month highs touched last week, while the Reserve Bank of Australia’s (RBA) hawkish stance keeps underlying demand for the Australian Dollar (AUD) intact. At the time of writing, the pair trades around 0.7002, near one-week highs.
The technical picture shows signs of improvement following a potential double bottom near 0.6900, suggesting buyers are gradually returning after several weeks of selling pressure. However, AUD/USD remains below key moving averages on the daily chart, keeping the recovery in check.
The Moving Average Convergence Divergence (MACD) is marginally positive, while the Relative Strength Index (RSI) recovers from oversold territory to near 49, indicating that selling pressure has eased but buyers have yet to gain firm control.
On the topside, initial resistance is seen at the 38.2% Fibonacci retracement at 0.7026, followed by the 100-day SMA at 0.7035 and the 200-day SMA at 0.7047, with a stronger cap emerging around the 50.0% retracement at 0.7067 and the 50-day SMA at 0.7077. Further up, the 61.8% retracement at 0.7107, the 78.6% level at 0.7165 and the cycle high zone near the 100.0% retracement at 0.7238 form a broader resistance band.
On the downside, immediate support emerges at the 23.6% retracement at 0.6976. A break below this level could open the door for a retest of the 0.6895-0.6900 support zone, where the potential double bottom has formed.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Megan Greene, a member of the Monetary Policy Committee (MPC) of the Bank of England (BoE), said on Tuesday that “wage disinflation has stalled,” a hint that salaries could begin to push prices higher.
Greene added that she continues to believe that “We [the BoE] should proactively lean against the risk of second-round inflation effects,” noting that the risks are “greater than we thought.”
She underscored that wage disinflation appears to have stalled at levels above the BoE’s goal. Her comments come a day before the release of inflation figures in the UK.
Key highlights:
Wage disinflation has stalled
Continue to believe we should proactively lean against the risk of second-round inflation effects
The risk of second-round effects is greater than we thought.
Forward-looking data point to pay growth closer to 3.5%
Wage disinflation appears to have stalled at levels above those consistent with inflation at 2%
Economy has shown surprising resilience
Labor market slack might have hit its peak
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Scotiabank strategists Shaun Osborne and Eric Theoret report USD/CAD trading near 1.4054, with the Canadian Dollar (CAD) supported by Alberta’s strong rejection of separation and higher Oil prices. Canadian inflation slightly undershot forecasts, but Governor Macklem’s recent comments on energy-related inflation have markets pricing greater risk of a Bank of Canada (BoC) rate hike next week. Scotia expects a 25 bps increase as swaps price around 20 bps of tightening.
CAD gains backed by politics and rates
"The initial results from Alberta indicate that voters rejected seeking to set in motion a binding independence referendum by a solid margin of 76/24%."
"Separatists will continue to advocate for independence in all likelihood, but the unequivocal margin of victory should help allay longer run sovereignty concerns. Canadian inflation data yesterday were modestly disappointing relative to forecasts."
"Headline inflation picked up slightly but the 0.1% M/M and 3.1% Y/Y report for September was a tenth below forecasts in both cases. Core measures remain subdued."
"However, comments from Governor Macklem over the past weekend, reflecting concern about the build up of energy-related inflation risks, have markets moving to price in greater risk of a rate hike at next week’s policy decision. Scotia is expecting a 25bps hike."
"Recall that Macklem has previously suggested that the Bank’s October forecast update could be decisive in determining whether tighter policy was warranted. Swaps are pricing 20bps of tightening risk now."
"Bearish - The CAD's technical condition continues to improve, with spot moving to a minor new cycle low this morning, extending USD losses below 1.41 and putting the 50% retracement of the USD’s September rally at 1.4030 well within reach."
"Note that the 40- and 100-day MA signals converge near 1.4045 currently and a break below this area may be a more meaningful signal that CAD gains can extend in the short run, potentially towards the mid-1.39s. Intraday resistance is 1.4070, with 1.4115 likely to represent firmer resistance to a USD rebound."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
- USD/CAD extends losses as BoC rate-hike bets and a softer US Dollar weigh.
- Higher Oil prices and reduced political uncertainty in Alberta offer additional support to the Loonie.
- Falling US Treasury yields weigh on the Greenback, although hawkish Fed expectations limit further losses.
USD/CAD extends its losing streak on Tuesday as the Canadian Dollar (CAD) draws support from a softer US Dollar (USD) and growing expectations of a Bank of Canada (BoC) interest rate hike. Meanwhile, traders assess conflicting headlines surrounding diplomatic efforts in the Middle East. At the time of writing, USD/CAD trades around 1.4052, near one-month lows.
Israel’s Channel 12 News reported that a proposal presented by Pakistan’s army chief to senior Iranian officials has received American approval and preliminary agreement from Iran. Oil prices initially declined following the news but quickly reversed course after Bloomberg reported that a diplomat involved in US-Iran negotiations disputed suggestions that a deal was close, while not denying that talks were continuing.
Higher Oil prices also lend some support to the commodity-linked Canadian Dollar, given Canada’s status as a major crude exporter. Meanwhile, Alberta, Canada’s major Oil-producing province, has rejected separation from the country, removing a source of political uncertainty.
Hawkish repricing of Bank of Canada (BoC) interest rate expectations also underpins the currency. Traders now widely expect the BoC to deliver its first rate hike of the year at its October 28 meeting. Governor Tiff Macklem said over the weekend that persistently high energy prices would lead the central bank to raise its inflation forecasts significantly in its upcoming quarterly projections.
Data released on Monday showed Canada’s annual inflation rate rose to 3.1% in September, its highest level in four months, driven by higher gasoline prices. The reading came in below market expectations of 3.2%.
Expectations of a BoC rate hike have pushed Canadian bond yields higher, narrowing the gap with their US counterparts. Higher US yields have been a key source of pressure on the Canadian Dollar in recent weeks.
Meanwhile, US Treasury yields have retreated from multi-year highs as concerns over AI-related investments prompted investors to move into government bonds last week, weighing on the US Dollar. The benchmark 10-year US Treasury yield stands near 5.08%, down from around 5.36% earlier this month.
However, expectations of another Federal Reserve (Fed) rate hike before year-end could cushion the downside in the Greenback and Treasury yields. Hotter-than-expected September US inflation reports reinforce the case for further tightening as policymakers seek to bring inflation back toward the central bank’s 2% target.
Traders nevertheless expect the Fed to pause at its October 27-28 meeting following September’s 25-basis-point (bps) increase. The CME FedWatch Tool shows markets pricing in a 17% chance of a rate hike this month and a 92% chance of an increase in December.
In the rates outlook, BNY Markets’ John Velis expects no Federal Reserve rate increase in October, with markets pricing a low probability for an immediate move. He sees December as the next likely and final hike of this cycle, noting that implied policy rates out to December 2027 have eased from their most hawkish levels as inflation remains largely supply-driven.
Market pricing moderates future hikes
"We don’t expect an October rate hike next week, and market expectations agree. At present the market is pricing only a 17% chance of a hike at the next FOMC."
"We don’t regard the increase in CPI and PPI inflation as large enough to signal that inflation is worsening beyond current levels. Inflation remains driven by supply-side concerns (airfares, for example) or pricing dynamics that aren’t related to the stance of monetary policy (personal services, housing and health care, for example)."
"We do think December is the next likely opportunity for an increase in the federal funds rate and expect that to be the last hike in this cycle."
"We note that the implied federal funds rate for December 2027 is now only 4.64%, implying just under 75bp of additional rate hikes. These market expectations are actually slightly below their most hawkish levels from just a few weeks ago."
"We have argued that the peak 100bp (including the September hike) that had been priced in would be hard to realize, especially as we get into March and April 2027 when base effects will help lower the annual rate of inflation."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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