Currency Market Looks To Predictable Powell And Unpredictable Trump

The US dollar softened last week following weaker-than-expected September CPI data, leading markets to price in a near-certain 25 bps Fed rate cut next week and another by year-end. This shift propelled commodity currencies higher while weakening JPY, GBP, and CHF, with the latter two also impacted by easing expectations from their respective central banks. Concurrently, US equities experienced their best week since early August, driven by strong corporate earnings and reduced trade war concerns stemming from progress towards a Trump-Xi meeting, further supporting risk-on sentiment and cyclicals.

Analysis

The US dollar softened last week after September's CPI data undershot consensus, with core inflation rising at its slowest pace since June. This led fed fund futures to price in a near-certain 25 basis point rate cut at the upcoming FOMC meeting, with expectations for another cut by year-end. This dovish shift drives the dollar's repricing.

The weaker dollar propelled commodity currencies (NZD, AUD, CAD) to mark gains, reflecting broader risk-on sentiment. JPY weakened sharply as global equities rallied, benefiting Japanese exporters. GBP and CHF also softened, partly due to a rotation into cyclicals and reinforced Bank of England easing expectations.

Wall Street experienced its best week since early August, with the S&P 500, Dow, and Nasdaq advancing 1.9%, 2.2%, and 2.3% respectively. This rally was supported by strong corporate earnings from Tesla and legacy autos, despite a Netflix stumble. Progress towards a Trump-Xi meeting further reduced trade tail risks, bolstering cyclical sectors.

The upcoming FOMC decision and Chair Powell's balance sheet guidance are critical. A dovish cut emphasizing growth risks is expected to support AUD/NZD/CAD and pressure JPY/CHF. Conversely, any pushback on December easing could broadly lift the USD. Investors should also monitor President Trump's Asia trip for tariff signaling.

Key Decisions for Investors

• Investors should consider long positions in commodity currencies (AUD, NZD, CAD) given the dovish Fed outlook and weaker US dollar.
• Closely monitor the upcoming FOMC decision and Chair Powell's balance sheet guidance, as a dovish tone could extend risk-on sentiment while hawkish pushback may strengthen the USD.
• Evaluate cyclical sector exposure in US equities, supported by strong earnings and reduced trade tensions, but remain vigilant on upcoming Trump-Xi meeting outcomes.
• Consider technical signals for FX pairs, specifically the bullish AUD/JPY towards 101-102.400 and the bearish GBP/AUD outlook.