FX Daily: USD is looking firm ahead of FOMC

DXY is firm ahead of FOMC, with added lift from a weaker EUR
Philip Wee26 Oct 2021
    Photo credit: Unsplash Photo

    DXY is looking to break above its four-day range between 93.5 and 93.8. The greenback is supported by record highs in the Dow and S&P 500 from sturdy US corporate earnings, a firm US 10-year treasury yield above 1.60% ahead of next week’s FOMC meeting, and a weaker EUR, the DXY’s largest component. Today, the US Conference Board will release its Consumer Confidence Index which consensus expects will keep sliding into 4Q21, to 108.5 in October from 109.3 in September. With present situation significantly higher (Sep: 143.4) than expectations (Sep: 86.6), consumer confidence is unlikely to hold back the Fed’s plan to taper asset purchases. The more important US data releases are advance 3Q GDP estimate (2.7% QoQ annualized consensus vs 6.7% previously) on Thursday and September’s PCE deflator (4.4% YoY consensus vs 4.3% previously) on Friday. 

    EUR is under pressure from Germany’s weakened outlook. EUR closed below 1.1620 for the first time since 18 October and is on track to revisit the year’s low of 1.1524 on 12 October. The Bundesbank warned that Germany would miss its full-year GDP growth forecast of 3.7% predicted in June. The central bank’s fear that 4Q growth would slow significantly was affirmed by the German IFO Survey where business sentiment slid a fourth month to 95.4 in October from 97.4 in September. The main drag on the German economy is coming from supply-chain constraints in its car manufacturing sector, and weaker consumer sentiment from worries over Covid and high oil prices. At its governing council meeting on Thursday, the European Central Bank is likely to remain dovish on downside growth risks than hawkish on upside inflation risks. Although Eurozone’s CPI inflation this Friday is estimated to pick up to 3.7% YoY in October from 3.4% from September, core inflation is expected to be unchanged at 1.9% YoY and hold below the 2% official target.

    AUD failed to close above 0.75 for a third session. The prices of iron ore, Australia’s largest export revenue source, is off its peak of USD800/MT on 12 October and held below CNY700 for a second session on Monday. Over the past week, copper prices came off their highs above USD480/lb to USD450. Australia is the world’s fourth largest producer of copper. Tomorrow, look for CPI inflation to slow to 3.1% YoY in 3Q21 after a spike to 3.8% in 2Q21. At its next meeting on 2 November, expect the Reserve Bank of Australia to affirm inflation as transitory and push back against the market’s early rate hike bets. The message was crystal last Friday when RBA conducted its first yield curve control purchases since February. For now, pay heed to the firm USD ahead of the important FOMC meeting on 3 November, especially now that EUR has started to look weak.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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