Dollar gets a boost from Fed’s Powell but will the move last?

Powell favours measured steps

With the world closely following the developments in the Middle East and, more specifically the start of the Israeli ground operation in Lebanon, Fed Chairman Powell chipped in the discussion about the size of the November rate cut. Despite the economy growing at a rather respectable level, the market was gradually leaning towards another 50bps move. However, Powell suggested that the Fed would likely stick with 25bps rate cuts moving forward, with a total of 50bps of easing announced by year-end.

This view is probably shared by most Fed members, but as Atlanta Fed President Bostic commented yesterday, the incoming information about the labour market, for example Friday’s non-farm payrolls figure, could tip the balance for a more aggressive reaction on November 7.

Dollar reaction positive, focus today on Fed speakers and data

The US dollar reacted positively to Powell’s comments, gaining ground across the board, while gold lost a small part of its recent gains. Interestingly, the initial negative reaction in US stocks was quickly reversed with the S&P 500 index finishing Monday’s session in the green. We are bound to hear more on the Fed rate cut issue today as a plethora of speakers including Bostic, Cook, Barkin and Collins will be on the wires. In the meantime, the data-rich calendar starts today with the focus being on the ISM manufacturing survey and the JOLTS job opening figure.

Amidst these developments, the vice-presidential debate will take place later today. Despite lacking the importance of the recent Harris-Trump discussion, both JD Vance and Tim Walz will try to rally their followers just 35 days before the election date. With Harris leading the polls, the onus is on Trump’s running mate, JD Vance, to win back some of the more moderate voters that have been possibly alienated by Trump’s rhetoric.

Could Eurozone inflation surprise to the downside?

While the market is predominantly interested in labour market data at this juncture, the preliminary eurozone inflation report for September will be released later today. Following Friday’s significant miss in both the French and Spanish CPI reports, and Monday’s weaker German and Italian inflation figures, there is a strong probability for headline inflation to weaken further, below the 1.9% yoy forecast.

With president Lagarde stating yesterday that employment growth will continue to decelerate, if the core inflation indicator also eases today below the recent trough of 2.7%, then the chances of a 50bps ECB rate cut in two weeks’ time could get a strong boost.

BoJ’s road paved with extra obstacles

The yen is under pressure again today as Ishiba, the new prime minister, has called a general election for October 27. While the Liberal Democratic Party (LDP), led by Ishiba, is expected to win the highest number of seats in the new parliament and form a new government, the timing of the election, four days before the October 31 BoJ meeting, is another obstacle to the Bank’s efforts to tighten further its monetary policy stance.

Considering the Fed’s intention to ease policy at both the November and December meetings, the balanced Summary of Opinions released earlier today and the overall mixed economic data, the window for further rate hikes by the BoJ might be closing fast.