Dollar Rally Stalls Despite Rebound in Trump Victory Odds, FOMC Meeting in Focus
The US presidential election stands as the foremost event this week, with significant ramifications for the US Dollar, bond and equity markets. The Dollar's strength in October was largely attributable to market expectations of a potential victory for former President Donald Trump. His administration's preference for protectionist policies—such as tariffs, tax cuts, and deregulation—had previously supported the Dollar by fostering a perception of "US Exceptionalism". Polling data released this week showed Vice President Kamala Harris leading in traditionally Republican-leaning states, triggering a notable adjustment in Trump’s winning odds on the Polymarket betting website, where they dropped from 67% to 56%:
This shift also caused a sharp retracement of the US dollar against other currencies, with DXY dropping from 104.30 to 103.50. Although implied odds of a Trump victory began to rise again on Tuesday, the dollar showed little reaction, suggesting that the currency correction may have been technically driven, with the polling news serving as a catalyst for the technical profit-taking move:
Nevertheless, a Republican victory will likely reignite a substantial rally in the Dollar, reinforcing policies that may negatively impact the Eurozone and China's economic outlooks. Conversely, a Democratic win might usher in a more multilateral approach to trade, potentially softening the Dollar as global trade tensions ease.
Beyond the election, the Fed’s policy meeting on Thursday is a focal point for investors. The market consensus, as reflected by the interest rate futures, anticipates two 25 bp rate cuts in November and December, with implied odds changing slightly in the last two trading days (even after the NFP report). Fed Chair Jerome Powell's subsequent remarks at the press conference will be scrutinized for indications regarding the trajectory of monetary policy into December and beyond.
The release of the ISM Services PMI data for October is another critical piece of the puzzle regarding much discussed slowdown in the US pace of economic expansion. Forecasts suggest a slight decline to 53.8 from September's 54.9, indicating continued expansion of activity in the sector but at a decelerated pace. Given the rising trend in PMI readings over the past three months, the threshold for a hawkish surprise may be quite high. However, any downside in the upcoming report could trigger a significant dovish reaction, potentially putting downward pressure on the dollar:
In Europe, the Euro's performance against the Dollar remains subdued as market participants await the outcomes of US-centric events. Recent economic data has prompted a recalibration of expectations regarding the ECB policy actions. Improved third-quarter GDP growth figures and upward revisions in manufacturing PMI estimates have alleviated some recessionary fears, leading to diminished expectations for aggressive ECB rate cuts.
Nevertheless, the manufacturing sector's PMI remains below the critical 50 threshold, signaling ongoing contraction. The ECB faces a tough task to balance between stimulating economic activity and managing inflation, and future policy decisions will hinge on how these dynamics evolve.
The Pound Sterling remains stable as attention turns to the Bank of England's policy meeting. A 25 basis point rate cut to 4.75% is widely anticipated, marking the second reduction this year. The move reflects concerns over slowing economic momentum and inflation rates below target levels.
Notably, internal divisions within the Monetary Policy Committee highlight differing views on the appropriate policy path. While a majority may favor easing to support growth, dissenting voices like Catherine Mann caution against premature cuts that could undermine long-term inflation targets.
From a technical perspective, the Pound remains confined between the support trendline and the 1.30 level, as market participants appear to be awaiting the outcome of the U.S. elections. A breakout in either direction is likely to determine the price trend over the short term, potentially lasting for several days:
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The US presidential election stands as the foremost event this week, with significant ramifications for the US Dollar, bond and equity markets. The Dollar's strength in October was largely attributable to market expectations of a potential victory for former President Donald Trump. His administration's preference for protectionist policies—such as tariffs, tax cuts, and deregulation—had previously supported the Dollar by fostering a perception of "US Exceptionalism". Polling data released this week showed Vice President Kamala Harris leading in traditionally Republican-leaning states, triggering a notable adjustment in Trump’s winning odds on the Polymarket betting website, where they dropped from 67% to 56%:
This shift also caused a sharp retracement of the US dollar against other currencies, with DXY dropping from 104.30 to 103.50. Although implied odds of a Trump victory began to rise again on Tuesday, the dollar showed little reaction, suggesting that the currency correction may have been technically driven, with the polling news serving as a catalyst for the technical profit-taking move:
Nevertheless, a Republican victory will likely reignite a substantial rally in the Dollar, reinforcing policies that may negatively impact the Eurozone and China's economic outlooks. Conversely, a Democratic win might usher in a more multilateral approach to trade, potentially softening the Dollar as global trade tensions ease.
Beyond the election, the Fed’s policy meeting on Thursday is a focal point for investors. The market consensus, as reflected by the interest rate futures, anticipates two 25 bp rate cuts in November and December, with implied odds changing slightly in the last two trading days (even after the NFP report). Fed Chair Jerome Powell's subsequent remarks at the press conference will be scrutinized for indications regarding the trajectory of monetary policy into December and beyond.
The release of the ISM Services PMI data for October is another critical piece of the puzzle regarding much discussed slowdown in the US pace of economic expansion. Forecasts suggest a slight decline to 53.8 from September's 54.9, indicating continued expansion of activity in the sector but at a decelerated pace. Given the rising trend in PMI readings over the past three months, the threshold for a hawkish surprise may be quite high. However, any downside in the upcoming report could trigger a significant dovish reaction, potentially putting downward pressure on the dollar:
In Europe, the Euro's performance against the Dollar remains subdued as market participants await the outcomes of US-centric events. Recent economic data has prompted a recalibration of expectations regarding the ECB policy actions. Improved third-quarter GDP growth figures and upward revisions in manufacturing PMI estimates have alleviated some recessionary fears, leading to diminished expectations for aggressive ECB rate cuts.
Nevertheless, the manufacturing sector's PMI remains below the critical 50 threshold, signaling ongoing contraction. The ECB faces a tough task to balance between stimulating economic activity and managing inflation, and future policy decisions will hinge on how these dynamics evolve.
The Pound Sterling remains stable as attention turns to the Bank of England's policy meeting. A 25 basis point rate cut to 4.75% is widely anticipated, marking the second reduction this year. The move reflects concerns over slowing economic momentum and inflation rates below target levels.
Notably, internal divisions within the Monetary Policy Committee highlight differing views on the appropriate policy path. While a majority may favor easing to support growth, dissenting voices like Catherine Mann caution against premature cuts that could undermine long-term inflation targets.
From a technical perspective, the Pound remains confined between the support trendline and the 1.30 level, as market participants appear to be awaiting the outcome of the U.S. elections. A breakout in either direction is likely to determine the price trend over the short term, potentially lasting for several days:
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
