Forex News

TD Securities economists Oscar Munoz and Eli Nir argue that strong US domestic demand, led by AI-related capital expenditure and resilient consumer spending, is inconsistent with a smooth return to the Federal Reserve’s 2% inflation objective. They expect consumer strength to ease in Q4, but still see domestic demand as robust and inflation remaining above target.

Domestic demand complicates Fed outlook

"Booming domestic demand continued to lift US economic activity during the third quarter, with AI capex and a buoying consumer acting as the main growth engines. While this bodes well for the economy's momentum near term, it does not do the Fed any favors regarding the inflation outlook."

"Excess demand in services is a notable culprit. Real spending on goods has normalized, but the same can't be said for services, which is most likely helping to keep supercore inflation uncomfortably elevated. Outside of energy and tariffs, sticky services prices remain a nagging issue for the Fed."

"Looking forward, we expect the US consumer to give back some strength in Q4: the carryover is low (soft Sep), and spending appears to be normalizing in Oct after a hot summer. We are penciling in that spending will cool to 1.8%, with GDP growth slowing back to trend-like speed at 2.3% q/q AR in Q4."

"The upshot is that as long as financial conditions remain broadly supportive, domestic demand will likely stay robust and inflation sticky above target. Put differently, the Fed will likely find itself having more work to do on the policy front. This supports our view that the Fed will have to further tighten the policy screws in the near future: we look for an additional 50 bps worth of tightening between now and Q1 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

ING’s Chris Turner reports that the Bank of Japan (BoJ) left rates at 1.25% while acknowledging its 2% inflation target has been met and highlighting upside price risks from energy, AI demand and a weak Japanese Yen (JPY). Markets expect the policy rate to reach around 2.00% next summer, and ING now looks for BoJ hikes in December and March/April, with USD/JPY staying near 155–160 before turning lower in 2Q.

BoJ seen hiking into next summer

"The Bank of Japan left the policy interest rate at 1.25% today and, for the first time, signalled that its 2% inflation target had been hit. Running through both the statement and the new Outlook report were three themes that the BoJ felt could all contribute to upside price risks: energy prices, AI demand and the weak yen. In that report, growth forecasts were left around 0.7-0.8% (near or above potential), while CPI forecasts were revised slightly higher."

"Markets are still debating whether the BoJ will hike next at the December or January meeting, but remain confident that the policy rate will be heading up to the 2.00% area next summer."

"The BoJ also gave a nod to rate hikes overseas and presumably will be aware of the risks of a weaker yen should it not track the Fed and ECB with a rate hike in December. We now think the BoJ will hike in December, with a likely follow-up in March/April."

"USD/JPY is a little lower today on this hawkish hold – although the dollar is a little lower across the board. We see it staying bid towards the top of a broad 155-160 range and then turning lower in 2Q next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• The US Dollar weakens as a technology stock sell-off pushes Treasury yields lower.
• Disappointing technology earnings raise doubts about returns on heavy AI spending.
• Persistent inflation keeps the Fed on a hawkish path, offering underlying support to the US Dollar.

The US Dollar Index (DXY) loses ground for a third straight day on Friday as a sell-off in technology stocks drives investors toward government bonds, pushing Treasury yields lower and weighing on the Greenback. Next week’s US midterm elections add to the cautious mood.

At the time of writing, the index, which measures the Dollar against six major currencies, trades around 101.65. Meanwhile, the benchmark 10-year US Treasury yield stands near 4.91%, down from 5.36% earlier this month, its highest level since 2002.

Results from major technology companies renew concerns about the cost of the AI spending boom. Alphabet shares fell 12.6% on Thursday, while Amazon plunged nearly 7% in premarket trading after their results disappointed investors. Intel sank more than 25% after issuing weaker-than-expected guidance.

The US Dollar is feeling the strain because the country is at the centre of the AI spending boom, which has helped support economic growth. Thursday’s Gross Domestic Product (GDP) report showed that the economy grew at an annualised rate of 3.4% in the third quarter, up from 2.2% in the previous quarter. Traders fear that weaker returns on AI investments could lead companies to cut spending, slowing economic growth.

Strategists at Brown Brothers Harriman argue that the ongoing tech sell-off is likely to keep the Dollar under pressure in the near term, with “the USD index (DXY) likely to test support at 101.00.” However, they stress that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

The Federal Open Market Committee (FOMC) voted 10-2 on Wednesday to keep interest rates at 3.75%-4.00%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack favouring a 25-basis-point (bps) rate increase. Fed Chair Kevin Warsh reiterated his commitment to delivering price stability. He noted that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.”

Inflation remains above the Fed’s 2% target. Data released on Thursday showed that September headline Personal Consumption Expenditures (PCE) inflation rose 0.5% MoM and 3.6% YoY, while the core measure increased 0.3% MoM and 3.1% YoY.

Higher energy costs linked to Middle East tensions risk prolonging elevated inflation. Together with Warsh’s remarks, this keeps expectations of a December rate hike firmly in play, with the CME FedWatch Tool showing the probability at around 75%.

Brown Brothers Harriman’s Elias Haddad reports EUR/USD has rebounded above 1.1200 after the ECB paused while pushing back against aggressive market tightening expectations. Strong Eurozone GDP and inflation projected above target keep a December rate hike in play, though French fiscal concerns could cap Euro gains and potentially drag EUR/USD back toward lower levels.

ECB pause but December hike still live

"EUR/USD recovered above 1.1200 after hitting a 17-month low at 1.1105 following yesterday’s ECB policy decision. The ECB paused and tempered tightening expectations. The ECB kept rates on hold at 2.50% as was widely expected but pushed back against the nearly 75bps of tightening implied by markets over the next twelve months."

"Nevertheless, resilient Eurozone economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (86% priced in). Indeed, real GDP rose 0.4% q/q in Q3 vs. 0.6% in Q2, double the consensus forecast, as growth in Spain and Germany offset France’s contraction."

"The ECB leadership change is unlikely to alter the near-term policy outlook and has no material implication on EUR. The ECB Governing Council is not a one-person show; 21 members have voting rights, including six Executive Board members and 15 governors of the national central banks."

"Bottom line, limited policy divergence between the ECB and Fed offers EUR/USD support. However, France’s ongoing fiscal troubles can drive EUR/USD down to 1.1000."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)