Greenback Dips as US GDP Underwhelms

The US dollar fell broadly on Wednesday following disappointing GDP figures for the September quarter, which came in below expectations. The US September-quarter GDP grew by 2.8% on an annual basis, missing the 3.0% forecast.

The USD saw its steepest declines in Asia-Pacific, despite an early drop in the Australian dollar after inflation in Australia for the same period slowed more quickly than anticipated. However, the Australian dollar later rebounded to close 0.5% higher.

Elsewhere, the EUR/USD gained, while USD/CAD retreated from recent highs. Meanwhile, the pound was unsettled following the UK’s Budget announcement on Tuesday.

Looking ahead, the Bank of Japan and China’s PMIs are key in Asian markets, while the US personal consumption and expenditure (PCE) index, a key US inflation measure, is due for release later.

UK Markets Volatile After Budget

Sterling traded erratically in response to the Labour government’s first Budget announcement. Although GBP/USD cut early losses, it remained below the $1.30 mark, despite traders reducing expectations for a rate cut from the Bank of England (BoE). The intraday swing between the high and low on the 10-year gilt yield was the second largest recorded this year.

UK Chancellor Rachel Reeves introduced £40 billion in tax increases, aimed at bolstering public services and addressing a £22 billion fiscal shortfall left by the previous government. Key measures include a 1.2% rise in employers' national insurance contributions and an increase in capital gains tax, marking the most tax-raising Budget in at least 50 years. However, major spending increases are also planned, leading some investors to adjust their expectations for BoE rate cuts, though a 25bps cut is still anticipated next week.

The pound remains choppy, weighed between fiscal and monetary dynamics and the risk premium tied to additional gilt issuance. While a slightly looser fiscal stance alongside tighter monetary policy should lend support to the pound, rising yields amid a depreciating currency indicate lingering market uncertainty and a lack of confidence in UK policy among investors.

China Manufacturing PMI in Focus

On the technical front, USD/CNY’s chart signals an uncertain outlook due to the whipsaw activity around the 7.06 inflection point, with the pair testing the 7.14–7.146 Fibonacci retracement range. For now, the next resistance levels are between 7.1804–7.1914, while key tactical support lies within 7.046 to 7.097.

As shown in the chart below, the key rate differential still supports an upward trend in USD/CNY, given the strong correlation. All eyes are now on the official manufacturing PMI. This index increased by only 1.2 percentage points to 54.5 in October, up from 53.3 in September, yet the Emerging Industries PMI (EPMI), a leading indicator, remains well below its historical October average of 59.7 for 2014–23.

Moreover, the consecutive monthly growth of 1.2 pp is considerably below the historical average increase of 4.8 pp. We anticipate the official manufacturing PMI will hold steady at 49.8 for October, unchanged from September’s reading.

US job openings dropped by 418,000 to 7.443 million in September, coming in below market expectations and marking the lowest level since January 2021, suggesting a cooling labour market. Despite this, the US dollar remains near three-month highs as investors await a series of upcoming risk events. US stocks were mixed, buoyed by gains in technology shares ahead of significant earnings reports and economic data releases.

With roughly a week to go before the Federal Reserve’s decision, these job openings figures contrast with the September employment report, which indicated a still-robust labour market. This has led traders to scale back expectations of a substantial rate cut. The latest data due this Friday could carry significant weight for the Fed, with the probability of a 25 basis point rate reduction currently around 95%. Meanwhile, speculation surrounding a potential Donald Trump victory has also supported the dollar, given his policies on tariffs, taxes, and immigration, which are viewed as inflationary. However, polling remains tight, and uncertainty about market reactions to the elections is high.

According to FX options, the market expects most of the foreign exchange volatility to materialise around the election week, possibly due to an uncertain outcome and the Fed meeting scheduled for the same period. In fact, the two-week implied-realised volatility spread for EUR/USD is at its highest since the volatile 2017 French elections.

Sterling Gains Ahead of Budget Announcement
The British pound is approaching the $1.30 mark against the US dollar once more, buoyed by increased risk appetite, which has also driven equities higher and seen Bitcoin nearing fresh record highs. Against the euro, sterling is similarly pushing upward, establishing a solid base around €1.20 as the UK’s Budget announcement approaches—a key domestic event. Should the market believe the new tax increases will negatively impact UK growth potential, the pound may face selling pressure. However, we anticipate an expansionary budget, as the Chancellor has modified the UK’s fiscal rules to allow additional borrowing for investment in growth-promoting projects, which could explain why sterling has strengthened this week.

If the Budget prompts rates traders to temper expectations for future Bank of England rate cuts, the pound could experience renewed demand, supported by more favourable rate differentials.

AUD/USD at Two-Month Low
The AUD/USD pair is technically trading near its 200-day moving average of 0.6658 and other nearby levels, which could provide potential for a reversal. Short-term resistance levels are at 0.6739 and 0.6817, while the next short-term support sits at 0.6348.

Australia’s CPI data, expected today, forecasts a year-on-year decrease in headline CPI inflation from 3.8% in Q2 to 2.9% in Q3. Due to a 7% quarterly fall in fuel prices and a 15% quarterly drop in electricity costs, we expect a modest 0.3% quarterly rise in Q3 headline CPI. The core CPI is expected to increase more noticeably by 0.7% quarter-on-quarter and 3.4% year-on-year. Service prices likely rose by a concerning 1.0% quarter-on-quarter and 4.5% year-on-year, although we estimate that annual inflation decreased to around 2.3% in September from 2.7% in August, reflecting recent reductions in fuel and electricity costs based on the latest monthly CPI data.

Geopolitics Driving Markets

Global markets are processing mixed developments from Japan and the Middle East, which have kept the US dollar trading within a narrow range as the week opens.

In Japan, the ruling coalition has, for the first time in 15 years, lost its majority in parliament. This setback comes as voters focus sharply on soaring inflation and recent political scandals. The USD/JPY pair rose by approximately 1% following some loss of momentum in the US session, yet remains on course for a fifth consecutive weekly gain.

Tempering the dollar’s gains is the reduction in Middle Eastern tensions, after a previously anticipated Israeli retaliatory strike did not target Iran's oil and nuclear facilities. Consequently, Brent crude has declined around 13% from its peak in early October, as investors turn their attention to the upcoming US elections, the non-farm payrolls report, and the next Federal Reserve policy decision.

Could the US Election Defy Economic Precedents?

Market sentiment is shifting, with a higher probability now priced in for a Trump victory. Voters continue to regard inflation as the most pressing issue, followed by immigration and overall economic health. Each of these concerns remains intricate and nuanced, which is keeping poll results within a narrow margin of error.

Since 1929, no incumbent party has lost an election if the US economy avoided a recession in the preceding two years. Superficially, this trend appears to favour the current administration, yet two key factors complicate the outlook. First, while the US did experience two consecutive quarters of contraction in 2022, this so-called "phantom recession" was not formally classified as such by the NBER. Second, approximately 60% of voters describe the US economy as poor, a perception largely fuelled by inflation, which may limit the Democrats' economic advantage.

Major US Jobs Data Kicks Off "Jobs Week"

Shifting focus away from geopolitics, the US economic calendar features crucial labour market data this week, although its impact may be moderated by other market drivers.

The series begins tonight with the JOLTS report, measuring job openings and labour turnover, with market expectations suggesting openings will hold steady at around 8 million. With the US dollar strongly supported throughout October, any further robust data points may contribute to additional greenback gains.

Pound Sterling has been trending upward against the Euro, though the near term may see more fluctuations and uncertain movement. Recently, the GBP/EUR exchange rate has hovered around the nine-day moving average, as investor interest in buying or selling fades whenever the rate deviates too significantly. The 9-day moving average currently sits around 1.20, a significant psychological barrier that GBP bulls have struggled to break. Previous analysis suggested that selling pressure around the 1.2030–1.2050 range becomes pronounced due to retail interest, as this level allows providers to offer euro buyers the attractive 1.20 mark. Consequently, speculators aware of this dynamic tend to sell in this range, which limits further strengthening of Pound Sterling.

Near-term developments may be impacted by external economic factors, including Friday's U.S. jobs report and the upcoming U.S. presidential election. GBP/EUR is notably responsive to global investor sentiment and often experiences pressure when stock markets decline. Currently, both stock markets and the Pound-Euro rate are in a bull run, reaching two-year highs over recent months. This trend could continue toward the year-end, though a strong U.S. jobs report may introduce volatility, potentially bringing GBP/EUR below 1.20 by week’s end. While speculation about the U.S. election outcome is abundant, analysts do not foresee a major impact on the GBP/EUR rate. In general, market expectations favour a stable election outcome, which may support continued GBP strength through the end of the year.

Key domestic events will also shape GBP movements, with the UK budget announcement expected on Thursday. The market anticipates a challenging budget for businesses and investors, with potential tax rises posing risks to UK growth. However, it is likely to be an expansionary budget, given the Chancellor's revised fiscal rules to allow for increased borrowing intended to fund growth-boosting projects. Analysts estimate these investments could raise growth by 0.5% in 2025, a development which could lead the Bank of England to approach rate cuts cautiously, supporting GBP in the longer term. Although increased borrowing could raise concerns in the market, reminiscent of the reaction to the 2022 mini-budget, analysts currently suggest such a scenario is unlikely, minimising the downside risk to GBP.