FX daily: Dollar bears to be stress-tested again this week

The dollar starts the new week on the softer side after solid gains last week. Following some much better activity data for the US, the question now is whether the jobs data is weak enough to justify further Fed rate cuts. That's why there's going to be extra scrutiny on data like JOLTS, weekly claims and Friday's payroll report. We favour a mildly softer dollar.

USD: It's all about jobs

Dollar bears suffered last week after a string of data questioned whether the Federal Reserve was right to cut rates earlier this month. Perhaps the standout number was the upward revision to the second-quarter GDP figure, which showed much stronger US consumption than previously believed. This, combined with another low jobless claims figure, was enough to shake out a few late-dollar short positions. There also remain the continued gains in US equities, with a sense that global passive equity funds, following benchmarks, will have to pour more money into the US.

This week is all about US jobs data. Now that the Fed has firmly swung behind the risk of a weaker jobs market being greater than the risk of inflation, employment data will have to come in on the weak side to maintain both expectations for Fed easing and a weaker dollar. That data unfolds over Tuesday (JOLTS job openings), Thursday (weekly jobless claims) and Friday (the September payroll report). Regarding payrolls, there is probably more focus on the unemployment rate now that Fed Chair Jerome Powell has said that it may just take a +0-50k job increase each month to keep the unemployment rate steady. Our team actually think there is a slight upside risk (dollar bullish) to Friday's jobs figures.

One additional event risk this week is a US government shutdown on Tuesday evening. That's probably a mild dollar negative if it happens, but it would look unlikely to last long if it did occur.

DXY will probably tread water today near 98 and make its first decent move of the week on tomorrow's JOLTS release.

EUR: Spain leads the way

While Germany continues its soul-searching on the future path for growth and France remains mired in budget uncertainty, Spain is doing very well. Spain's sovereign debt received a one-notch upgrade to A from A- from Fitch on Friday evening. The ratings agency cited better growth prospects for the country as it revised those growth forecasts higher. Spain's news serves as a reminder of the north-south divide in the eurozone and why government bonds in the eurozone area have remained resilient in the face of the news out of France.

Still on the subject of Spain, the country is one of the first to release September CPI data today, as is Belgium. Both headline and core inflation are expected to pick up. The news should be a precursor to the French and German CPI numbers tomorrow, and then the full eurozone release on Wednesday. We and consensus see the eurozone flash CPI rising to 2.2% year-on-year from 2.0%, with some looking for 2.3%. A higher number could further rein in expectations of one final European Central Bank cut and help the euro.

There are also plenty of ECB speakers this week. Today, we'll hear from Germany's Joachim Nagel at 11:00am CET and Chief Economist Philip Lane at 2:00pm CET.

EUR/USD looks to have put in a short-term low near 1.1650, but will require some softer US jobs data to break back above the 1.1790/1800 area this week.

GBP: Focus on the UK Labour Party conference

Sterling has been underperforming since around the middle of September, with plenty of focus on whether the UK is 'going bust' or will require an IMF bail-out – neither of which is likely. At the heart of that story is weak UK growth and parlous public finances, which leave the UK Labour government with very little room for manoeuvre. Not helping that story last week was an interview given by Prime Minister Keir Starmer's main rival, Andy Burnham, that the government should ignore the bond market. With that in mind, there will be a lot of focus on the Labour Party conference, which kicks off in Liverpool today. Any signs that the government will cede ground to the left wing of the party by, say, withdrawing the two-child cap on benefits, would be taken poorly by Gilts and sterling.

If sterling can survive that party conference unscathed, then presumably more rhetoric from Bank of England hawks later in the week – including Governor Andrew Bailey – could provide sterling with a little more support.

So far, support has held at 1.3300 for cable. And US jobs data will help determine whether we end the week over 1.35.

CEE: Polish inflation will determine further rate cuts

This week, attention should return to local data in Central and Eastern Europe. Tomorrow, Poland's inflation figures for September will be released. We expect headline inflation to jump from 2.9% to 3.0%, driven by a shallower decline in gasoline prices compared to August. Core inflation is estimated to have eased further, while food and energy inflation remained broadly stable. More pronounced declines in headline inflation are expected in November and December.

On Wednesday, we will receive PMI figures across the region, where we could see some slight improvement in sentiment. On Friday, Turkey's inflation figures for September will be released. We expect a further decline from 33.0% to 32.2% but month-on-month, we will see some acceleration from 2.0% to 2.4%. Risks are on the upside, given continuing pricing pressures in food, with adverse weather conditions and the start of the school season pushing education inflation higher.

In the Czech Republic, general elections will be held on Friday and Saturday, suggesting an opposition victory, but the latest polls show a closer race than expected. In recent days, the market has priced in a higher fiscal premium, with government bonds underperforming their CEE peers. However, we do not expect a significant widening of the fiscal deficit in any scenario, and the long end of the curve seems too high, although we may see more pressure here this week.

EUR/CZK seems untouched for now, and historically, FX has not reacted much to elections in the Czech Republic, which should also be the case this time. In general, conditions in the CEE region are turning positive for FX again. Market rates rebounded significantly last week, and EUR/USD is heading up again. We should also see some rebound in the CEE region this week.

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