Dollar 'fails to rally' for a third week despite strong US data

Matthew Ryan, CFA Ebury

For the third week running, the dollar failed to rally on good news or on risk aversion.

The Fed held rates, but there were two dissents in favour of a hike and both of the third-quarter GDP and September inflation reports came in hot. Markets now price a 75% chance of a December hike, with no more than one additional rate increase in 2027, showing significant convergence to our views of one and done in December. The line from the Fed that it already sees previous tightening as doing some work adds credence to this view.

Payrolls data on Friday and any political surprises from Tuesday’s midterms are the main risk events this week.

With prediction markets pricing a 95% chance of Republicans losing control of at least one house of Congress, it would take a massive polling error for the midterm news to move markets significantly.

A Republican sweep remains the main tail risk for the dollar, and we would likely see a rally as investors brace for more tax cuts, greater spending, a wider deficit and renewed fears over Fed independence.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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