Forex Today: Can ECB and key US data trigger a breakout as major pairs remain range-bound after Fed?

What is on the market agenda for Thursday, 29 October?

Direction remains elusive for major currency pairs on Thursday, with little market response to the Federal Reserve's (Fed) policy decisions or Chair Kevin Warsh's remarks on the outlook. Attention now turns to the European Central Bank (ECB), which announces its meeting outcome later in the day. On the US economic calendar, the first estimate of third-quarter Gross Domestic Product (GDP) growth is due alongside September's Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation measure.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

How Has the US Dollar Performed This Week?

Against the major currencies listed below, the US Dollar (USD) has performed best against the New Zealand Dollar this week. The table details its percentage changes over the period.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.68%	0.37%	0.49%	-0.35%	-0.06%	1.40%	0.49%
EUR	-0.68%		-0.33%	-0.21%	-1.05%	-0.82%	0.65%	-0.25%
GBP	-0.37%	0.33%		0.04%	-0.77%	-0.48%	1.04%	0.05%
JPY	-0.49%	0.21%	-0.04%		-0.80%	-0.61%	0.94%	-0.09%
CAD	0.35%	1.05%	0.77%	0.80%		0.24%	1.70%	0.83%
AUD	0.06%	0.82%	0.48%	0.61%	-0.24%		1.48%	0.36%
NZD	-1.40%	-0.65%	-1.04%	-0.94%	-1.70%	-1.48%		-0.93%
CHF	-0.49%	0.25%	-0.05%	0.09%	-0.83%	-0.36%	0.93%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following that row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

As expected, the Fed kept its policy rate at 3.75%–4.00%. Chair Warsh used the post-meeting press conference to reaffirm the commitment to price stability, without signalling a December rate hike. Even so, the CME FedWatch Tool now puts the market-implied probability of a 25 basis points interest rate increase at the year's final meeting at about 83%, up from about 80% ahead of the Fed decision. The US Dollar (USD) Index is slightly firmer on the day above 102.20, following Wednesday's 0.2% decline, while the benchmark 10-year US Treasury bond yield remains near 5%. US stock index futures, meanwhile, show a mixed picture: Nasdaq Futures and S&P are down 1.2% and 0.4%, respectively, whereas Dow Futures are up about 0.4%.

A 7/10 FXS Speechtracker score, matching the historical average, captured the firmly hawkish tone of Fed Chair Warsh's press conference and his continued resolve on inflation. His emphasis that “ensuring price stability is not about a fixed date on a calendar” and insistence on “no ifs and or buts, we will deliver price stability” conveyed an uncompromising approach guided by the data. References to “new monetary medicine,” September's reduction in accommodation and improving inflation expectations reinforced that stance.

Following the Fed event, a rise of +14.39 points took the FXS Fed Sentiment Index to 141.89, comfortably above the neutral 100 threshold and firmly in hawkish territory. The sharp increase indicates that markets are absorbing Warsh's message: monetary tightening is having an effect, inflation expectations are “going the right way,” and a “soft” inflation target will not be tolerated. Such conditions typically favour the Dollar while weighing on risk-sensitive currencies.

Can the Dollar extend gains after the Fed pause as OCBC sees limited upside?

OCBC analysts note that Fed policymaker Kevin Warsh “pushed back against the idea that the economy is running too hot,” “despite a strong economy and sticky inflation,” and stressed that “incoming data will determine the next move.” The bank interprets this as meaning that “Warsh remains willing, but not eager, to tighten further,” while reaffirming that it “continue[s] to expect a second and final 25bp hike in December.”

While OCBC analysts believe “the risk of further Fed tightening should keep the USD supported,” they also “see limited scope for a sustained dollar rally unless underlying inflation continues to surprise to the upside.” The bank notes that “after the Fed pause, the Bank of Canada hike and the RBNZ surprise hold, attention now turns to the ECB,” as shifting global monetary policy conditions look set to influence the Dollar and Euro outlook over the coming weeks.

With the ECB expected to hold key rates steady, President Christine Lagarde's policy guidance could affect the Euro's valuation later in the day, particularly given fiscal uncertainty in France. At the time of publication, EUR/USD was near 1.1140, down about 0.15% on the day.

USD/CAD fell about 0.4% on Wednesday following the Bank of Canada's (BoC) announcement of a 25 bps policy rate increase to 2.5%. According to BoC Governor Tiff Macklem, interest rates have no pre-determined path; he added that, even following the hike, the policy rate remains low enough not to constrain growth. The pair is consolidating around 1.4000 early on Thursday.

GBP/USD ended a three-day run of losses with a marginally higher close on Wednesday. During Thursday's European session, it is trading sideways above 1.3300.

USD/JPY has steadied below 158.00 on Thursday, following a modest decline on Wednesday.

Gold is under pressure early on Thursday, trading lower below $4,050 following a virtually flat close on Wednesday.

ECB: Frequently Asked Questions

How does the ECB's role affect the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and overseeing monetary policy across the region. Maintaining price stability is its central mandate, which involves keeping inflation at around 2%. Adjustments to interest rates are its main means of pursuing that goal. Higher relative interest rates generally strengthen the Euro, while lower relative rates tend to weaken it. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

How does Quantitative Easing (QE) work, and what does it mean for the Euro?

Under extreme conditions, the European Central Bank may turn to Quantitative Easing, a policy tool known as QE. This involves printing Euros to purchase assets, typically government or corporate bonds, from banks and other financial institutions. The Euro usually weakens as a result. Used as a last resort, QE comes into play when interest rate cuts alone are unlikely to deliver price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the Covid pandemic.

How does Quantitative tightening (QT) work, and why does it matter for the Euro?

As the opposite of QE, Quantitative tightening (QT) follows when the economy is recovering and inflation begins to pick up. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by purchasing government and corporate bonds. Under QT, by contrast, it halts additional bond purchases and no longer reinvests the principal received as its existing bonds mature. This is generally supportive, or bullish, for the Euro.