The latest US durable goods orders, a proxy for capital expenditure, are due out on Thursday at 12:30 GMT. The preliminary Markit PMIs for October will follow a few minutes later. While important, these are unlikely to change the narrative around the Fed or the dollar. Much of the greenback’s direction will frankly depend on other currencies, mainly on the pound and euro, which may still have some room to advance as Brexit risks fade. That said, a not-so-dovish rate cut by the Fed next week could halt the dollar’s losses.
It’s (not) tremendous
Even though the trade war took a breather after the US and China reached a de-facto ceasefire, markets are still convinced that the Fed will cut rates again next week – assigning a ~90% implied probability to such an action. Investors seem to be saying that for all the “tremendous” rhetoric and optimistic comments by Trump and others, nothing has really changed in the big picture, and the current truce may be quite fragile.
Indeed, faced with a US economy that is slowly but surely losing momentum, the Fed is virtually certain to cut rates again, especially since policymakers did not push back against such expectations in recent weeks. Mounting speculation for another cut has likely contributed to the dollar’s latest drop, but the main factor has been the overwhelming recovery in the pound and to a lesser extent the euro, as the threat of a no-deal Brexit faded again.
Was the dollar also driven by Brexit?
The upcoming US data are unlikely to substantially change this dynamic. Durable goods are expected to have declined on a monthly basis in September, but that might not worry markets much, as this data set is extremely volatile on a month-to-month basis. Perhaps more attention will fall on the Markit PMIs for October since they will provide the first glimpse into how the economy entered Q4.
Turning to the dollar, much of its forthcoming direction will likely depend on Brexit. Remember that FX is a zero-sum game, meaning that when a currency strengthens another must weaken, so the recent surge in the pound and euro have hurt the dollar considerably. Is the sterling rally over? Perhaps not – while a lot of optimism has been baked into the pound already, the currency may still have some room to advance, as nearly all Brexit outcomes now seem positive.
Hence, the latest pullback in the dollar may not be over yet, but admittedly, a not-so-dovish rate cut by the Fed could help the currency stabilise or even recover a little. A cut next week would be the third one in three consecutive meetings, so having acted aggressively already, Fed officials will probably want to keep their options open for a pause in December. Chairman Powell could highlight that the recent stimulus needs time to work, and then suggest that the bar for any more cuts is quite high for now.
Taking a technical look at EUR/USD, advances in the pair may encounter immediate resistance at 1.1180, before the 1.1230 zone comes into view.
On the downside, support to declines could come initially from the 1.1110 area, with a negative break opening the door for a test of 1.1065.
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