Forex Today: Major pairs stay rangebound after Fed as ECB and key US data take focus

29 October, Thursday: Key developments to watch

Third-quarter US Gross Domestic Product (GDP) growth receives its first estimate on Thursday. September’s Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, is also on the US economic calendar. Major currency pairs remain without a clear direction after the Fed’s policy decisions and Chair Kevin Warsh’s outlook comments drew little market response. Later in the day, the European Central Bank (ECB) will announce the outcome of its meeting.

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

US Dollar Performance This Week

The US Dollar (USD) recorded its strongest performance against the New Zealand Dollar this week. Its percentage changes against the major currencies listed are shown below.

	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 the major currencies appear 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).

3.75%–4.00% remains the Fed’s policy rate range, as expected. At the post-meeting press conference, Chair Warsh reaffirmed the commitment to price stability without signalling a December rate rise. Nevertheless, 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% before the meeting. The US Dollar (USD) Index is slightly higher on the day above 102.20, following Wednesday’s 0.2% decline. The benchmark 10-year US Treasury bond yield remains near 5%. US stock index futures are mixed: Nasdaq Futures and S&P are down 1.2% and 0.4%, respectively, while Dow Futures are about 0.4% higher.

A 7/10 FXS Speechtracker score, matching the historical average, captured Fed Chair Warsh’s firmly hawkish press conference tone and steady 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, data-dependent approach. References to “new monetary medicine,” September’s reduction in accommodation and improving inflation expectations reinforced that stance.

141.89 was the FXS Fed Sentiment Index reading after the Fed event, a rise of +14.39 points. That leaves the index firmly hawkish and well above the neutral threshold of 100. The sharp increase reflects markets absorbing Warsh’s message: Fed tightening is taking effect, inflation expectations are “going the right way,” and a “soft” inflation target will not be tolerated. Such conditions typically support the Dollar while weighing on risk-sensitive currencies.

Dollar supported by Fed pause; OCBC sees limited upside

According to OCBC analysts, 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 concludes that “Warsh remains willing, but not eager, to tighten further,” reiterating that it “continue[s] to expect a second and final 25bp hike in December.”

While OCBC believes “the risk of further Fed tightening should keep the USD supported,” its analysts “see limited scope for a sustained dollar rally unless underlying inflation continues to surprise to the upside.” The bank also 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 over the coming weeks.

No change in key ECB interest rates is expected. Against the backdrop of fiscal uncertainty in France, President Christine Lagarde’s policy outlook comments could affect the Euro’s valuation later in the day. At the time of publication, EUR/USD was near 1.1140, down about 0.15% on the day.

USD/CAD declined about 0.4% on Wednesday following the Bank of Canada’s (BoC) announcement of a 25 bps policy rate increase to 2.5%. Governor Tiff Macklem said rates have no pre-determined path. He added that, despite the increase, 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 after posting a modest decline on Wednesday.

Gold is trading lower below $4,050 early on Thursday. The metal remains under pressure after finishing Wednesday’s session almost unchanged.

ECB: Key Questions Answered

The ECB’s role and its impact on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and directing the region’s monetary policy. Maintaining price stability is its principal mandate, meaning inflation should stay around 2%. Interest rate increases and cuts are its main tools for meeting that objective. Higher relative interest rates generally strengthen the Euro, while lower rates tend to have the opposite effect. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of Eurozone national central banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How it affects the Euro

In exceptional circumstances, the European Central Bank can turn to Quantitative Easing (QE). Under QE, the ECB prints Euros to purchase assets, usually government or corporate bonds, from banks and other financial institutions. The policy generally weakens the Euro. Used as a last resort, QE applies when interest rate cuts alone are unlikely to secure price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 amid persistently low inflation, and during the Covid pandemic.

Quantitative tightening (QT): Implications for the Euro

Following QE, an economic recovery and rising inflation can prompt Quantitative tightening (QT), the reverse process. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds. QT instead entails halting further bond purchases and no longer reinvesting the principal from maturing bonds in its existing portfolio. The effect on the Euro is generally positive, or bullish.