FX Market Update: Euro in Focus Ahead of ECB Rate Cut

US dollar index surge continues

The US dollar continued soaring after the US published strong economic numbers, pointing to a potential hawkish Federal Reserve. The DXY index, which measures its performance against a basket of currencies, rose to $103.17.

A report released earlier this month showed that the economy created more jobs than expected. It added 254k jobs in September while the unemployment rate retreated to 4.1% during the month.

Another report released last month showed that the country’s inflation continued falling in September. The headline Consumer Price Index (CPI) fell from 2.5% in August to 2.4% in September, higher than the expected 2.3%.

Therefore, these numbers mean that the Federal Reserve will not cut interest rates at a faster pace than was initially expected. Minutes released last week showed that some officials resisted the 0.50% cut in the last meeting.

The previous US dollar index drop was mostly because most analysts were expecting the Fed to deliver more cuts this year.

New Zealand stabilizes after RBNZ decision

The New Zealand dollar crashed to 0.6053 last week and then bounced back to 0.6100. The AUD/NZD pair also retreated to a low of 0.9017 and then rose to 0.9050.

This price action happened after the Reserve Bank of New Zealand (RBNZ) decided to cut interest rates by 0.50% for the first time in over four years.

The bank’s cut happened after a recent report showed that New Zealand’s inflation moved near its 2% target rate. There are also signs that the economy was slowing, with the unemployment rate remaining above 4%.

Therefore, analysts expect that the first cut means that the RBNZ will accelerate its rate cuts in the coming months. In a note, an analyst from Moody’s said:

Overall, the October meeting reinforces the bank's dovish stance and indicates no clear signs of slowing in November. With inflation within target and the labor market fragile, the RBNZ will ease rates more swiftly.

Moody's

British pound retreat continues

Sterling continued falling as the market reacted to a strong GDP report released on Friday. The GBP/USD pair retreated from the year-to-date high of 1.3433 to a low of 1.3067, its lowest point since September 12.

A report by the Office of National Statistics (ONS) showed that the economy returned to recovery in August after contracting in the previous two consecutive months.

The GBP/USD pair will be in the spotlight this week as the country publishes its inflation and jobs numbers. The inflation report expected on Wednesday is expected to show that the headline Consumer Price Index (CPI) retreated to 1.9% in September.

These numbers will help to determine the next actions by the Bank of England (BoE). Like other banks, the BoE has started cutting interest rates to stimulate the economy. It slashed rates by 0.25% in August and left them unchanged in its last meeting.

Analysts expect that the bank will cut interest rates in the next meeting since there are signs that the economy is slowing.

Euro falls ahead of ECB decision

The EUR/USD exchange rate has been in a strong bearish trend in the last few weeks, paring back some of the gains made in the last two months. It has dropped from a high if 1.1215 to 1.0900.

The euro will be in the spotlight this week as the European Central Bank (ECB) delivers its interest rate decision.

Analysts expect the bank to slash interest rate by 0.25% for the third consecutive meeting since the bloc’s economy is slowing.

The bloc’s inflation has moved to the bank’s target rate of 2.0%, while industrial and manufacturing production have continued falling in the past few months. In a note, a Bloomberg analyst said:

The ECB will lower borrowing costs by 25 basis points in October and again in December. After that we see quarterly moves as policymakers feel their way to neutral.

Bloomberg

Canadian dollar crash continues

The Canadian dollar continued its downtrend, falling to its lowest level since August 7. The USD/CAD exchange rate has risen in the past eight consecutive days.

This price action is mostly because of the strong US dollar and the fact that the Bank of Canada (BoC) has been one of the most dovish central banks in the market.

The bank has slashed interest rates several times this year because of the slow economic growth.

The key catalyst for the USD/CAD pair will be the Canadian inflation report on Wednesday. Economists expect the report to show that the monthly inflation retreated by 0.2% in September. They also see it rising from 2.0% to 2.1% on a year-on-year basis, while the core CPI rose to 2.2%.

Indonesian rupiah in the spotlight

The Indonesian rupiah has slumped by over 3.30% from its highest level this year because of the strong US dollar.

It has also slumped as the Bank of Indonesia has started cutting interest rates. It cut rates by 0.25% in the last meeting to 6.0%, and analysts expect the bank will cut rates this week. However, ING analysts expect the bank to maintain rates steady. In a note, they said:

After its recent rate cut and some recent softening of the IDR, we don’t expect any further action from Bank Indonesia at its upcoming meeting. The policy rate should remain at 6.0%. Real rates remain high though, so we could still see some more easing before the year-end if the IDR firms.

ING