FX daily: Fed minutes can throw cold water on USD rally

The Dollar continues to rally, with political events in France and Japan weighing on the two largest components of DXY – EUR and JPY. Today’s deadline to form another government in France bears downside risks for EUR, but the dollar run looks overdone and dovish-leaning Fed minutes could trigger a correction. Elsewhere, the RBNZ surprised with a 50bp cut.

USD: US story doesn't justify such a strong Dollar

The dollar’s strong performance since the start of the week has largely stemmed from negative political developments weighing on the euro and yen. These two currencies make up 71% of the DXY index, which is now at its highest since early August.

The ongoing US government shutdown – still showing no signs of resolution – is not a dollar-positive in itself, but remains the lesser evil compared to the political woes in France and Japan. It’s also doing the dollar a favour by suspending speculation around jobs market deterioration. The big winner, anyway, remains gold, which has hit the historical $4,000 mark, and our commodity strategists see further room to run.

Today’s FOMC minutes from the September meeting can test the dollar’s bullish momentum. The widespread perception when the Fed cut rates was that the statement and Dot Plot projections were dovish-leaning, but Fed Chair Jerome Powell’s press conference added a layer of cautiousness, defying expectations to signal a pre-set path for back-to-back cuts. The minutes will tell us where the consensus sits within the FOMC on rates, jobs and inflation. One source of downside risk for the dollar is any support for a 50bp cut. Only Stephen Miran voted for it, and Powell said there was “no widespread support” for a half-point move, but were there other members openly discussing it?

When we look at the OIS-implied Fed pricing, our perception is that it’s still too cautious on easing, and we see most of the upcoming US events as bearing risks of dovish repricing and USD weakness. 45bp of easing is discounted for December, but pricing is quite conservative beyond that, with 67bp in total by the end of 1Q26. That’s where we can see some action in terms of dovish repricing.

Aside from the Fed minutes, great focus will remain on any US shutdown news. Given how little the dollar has suffered from it, we think any indications of constructive interparty talks can yield only moderate and short-lived support for the greenback.

EUR: France remains in focus today

The outgoing French prime minister has been asked by President Macron to give one final shot at bringing together the deeply divided parliament and form a government that can deliver on urgent budget issues. The deadline is set for tonight. Should talks fail, snap elections may well become the base case, with also an increased risk of Macron resigning too, although the latter is way less likely. Betting markets place a 60-65% probability of legislative elections being called by the end of next week, and only 15% of Macron’s presidency ending before year-end.

If snap legislative elections are called, we could see another ~0.2-0.5% knocked off EUR/USD as it would imply a delay in budget decisions and could add pressure on OATs. The formation of a new government today may not yield huge benefits to the euro, considering the fragility of any political agreement at this stage.

But based on our view that the dollar will face downside risks with today’s Fed minutes and the USD rally looking a bit overdone in general, we think EUR/USD back at 1.170 is more likely than a test of 1.150 in the coming days.

NZD: RBNZ to cut again after 50bp move

The Reserve Bank of New Zealand surprised with a 50bp rate cut today. Furthermore, guidance remained dovish, signalling openness to further reductions, resulting in a 1% drop in NZD/USD.

We are quite surprised by the decision, as we thought the lack of inflation data for the third quarter would warrant more caution with cuts this month. Instead, it appears that the RBNZ is firmly focused on supporting economic activity, and the larger-than-expected 2Q GDP contraction was enough to trigger an outsized cut.

We now expect a 25bp cut in November to 2.25% and a good chance of a follow-up reduction to 2.0% in early 2026. We think NZD/USD still has some room to recover on the back of our bearish USD call this quarter, but on the crosses it may keep lagging its closest peer AUD.

PLN: The outlook for rate cuts

Today's meeting of the National Bank of Poland should show the central bank's willingness to cut rates in the future. Today's decision is between no change at 4.75% or a 25bp rate cut. Our economists prefer no change and are waiting for the NBP's new forecast in November.

This is also the consensus of surveys; on the other hand, there are some expectations of a rate cut today and market pricing leaning in this direction. While there has been a visible decline in inflation and a favourable outlook for the coming months, including the decision to freeze energy prices for the rest of the year, which was one of Governor Adam Glapinski's conditions in September, we also have a strong economy and fiscal policy indicating another high deficit next year, which is causing the NBP to worry about a return of inflation.

We believe that even if the NBP cuts rates, it should be accompanied by a hawkish statement and a rejection of further rate cuts this year. The market is pricing in almost two rate cuts, including today's decision, by the end of the year. EUR/PLN remains in the range of 4.245-275. Last week, we saw some rebound from the upper band, and for now, the PLN seems fairly priced here. Conviction in the NBP's reaction function remains low on our side, and surprises cannot be ruled out. However, overall, we are leaning more towards the hawkish side, which could support EUR/PLN lower towards the lower edge of this range.

RON: Big levels should trigger greater central bank activity

The meeting of the National Bank of Romania should not be a major event today, and leaving rates at 6.50% is a certainty. Inflation has surprised on the upside in the last two months, and given the impact of the consolidation package, we see a peak of around 10% in September and October. Given the nature of the current inflation spike, the NBR has decided to look through it, but certainly, rate cuts will not return to the table until at least the second half of next year.

EUR/RON almost approached 5.010 yesterday, the highest since the May sell-off, and it seems that the central bank is allowing FX more flexibility. However, since mid-September, RON has already lost 0.75%, and we believe that the central bank cannot afford further pro-inflationary pressures. Therefore, we expect 5.010 to be a hard limit, and we will see more NBR activity in the market in the coming days, which could attract some carry trades back into the market. On the other hand, it is difficult to see a trigger for a RON rally at this point, and we will have to get used to the new levels.

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