The Dollar fell for a fourth day as yields dropped and the Fed looked set to hold. Hot UK inflation boosted Sterling, and Japan’s CPI lifted the Yen, while the Euro stayed stuck behind France.
The US Dollar Index (DXY) is down for a fourth straight day, hovering around 101.60, as a sharp fall in US bond yields and a Federal Reserve that looks set to pause pulled the currency lower. Over the past seven days, the Dollar fell against every major currency, including a 0.83% drop against the Swiss Franc and 1.43% against the Australian Dollar. But the winners were not evenly spread. The British Pound and the Japanese Yen got the biggest boosts from fresh data, while the Euro, still dealing with France, barely moved.
Why yields fell, and the Dollar followed
Thursday was the day the AI trade cracked. The Nasdaq Composite fell 2.6%, its worst day since June, and the S&P 500 fell 1.2%, its worst session since July. Nvidia CEO Jensen Huang told CNBC that "capital is scarce. The demand [for] the capital is much greater than the availability of the capital." Money ran into bonds, and the 10-year Treasury yield slid 18.5 basis points to 4.961%, its lowest in over a month and back below 5%. The 2-year fell 17.5 basis points, and the 30-year fell 15.
The Fed side is calm. The CME FedWatch tool shows a 92.8% chance of no change at the October 27-28 meeting, up from 84% a day earlier, and a Reuters poll of nearly all economists expects a skip in October and a hike in December. Fed Chair Warsh gave no hint of the outcome, only that hotter inflation had not changed his assessment of the economy. With a hold priced in and yields falling, the Dollar has lost two supports at once.
Sterling: hot inflation and a hike on the way
GBP/USD holds just above 1.3400 after UK September CPI came in at 3.5% year on year, against 3.4% expected and 3.1% in August. That is an 11-month high, driven by petrol and diesel. Core inflation rose to 2.8% against 2.7% expected. LSEG data shows a 98% probability of a 25 basis point Bank of England hike to 4.0% on November 5, with most traders also pricing another one in December.
ING sees both "independent sterling strength and independent euro weakness" in the EUR/GBP move, and expects EUR/GBP to stay offered in a 0.8360-0.8430 range for now. It also says next week's UK Budget "looks unlikely to derail the recent EUR/GBP break below 0.8400." UK retail sales are due today.
The Euro: a bounce with a ceiling
EUR/USD is near 1.1225, bouncing from below 1.1200 but still inside a one-week range. The drop in US yields helps the Euro, while France's debt and political crisis keeps capping gains. Flash PMIs for the euro area come today, and a miss would hurt the bounce. The general direction stays bearish unless the pair can clear its recent resistance zone.
The Yen: Japan's CPI revives BoJ hike bets
USD/JPY dropped to about 156.00, a one-month low, after Japan's national CPI reaffirmed bets for an imminent Bank of Japan rate hike. The fall in US yields adds pressure, and safe-haven demand has also helped the Yen. Japan's Kiuchi said conditions are not met for the government to declare an official end to deflation. The BoJ meets next week.
The Aussie and the defensives
AUD/USD is consolidating just above 0.7000, near its monthly top, supported by a hawkish Reserve Bank of Australia, although Australian PMIs point to a slowdown. ING says the backdrop "probably favours a little more outperformance of the defensive currencies over commodity currencies," but warns that "until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board." FXStreet adds that reports of post-midterm US-Israeli strikes on Iran have boosted alternatives to the Dollar this time.
What this means for the Dollar
The Dollar's direction is soft, but the trend isn't broken. A Fed on hold and falling yields are a drag, yet the short end of the US yield curve is still firm, and oil-driven inflation fears keep a December hike on the table. In general, expect a range-bound Dollar with a soft tone until the PMIs and next week's Fed show whether yields keep falling.
What traders should prepare for
UK retail sales (06:00 GMT) and flash PMIs for Germany, the euro area and the UK (07:30-08:30 GMT)
US flash S&P Global PMIs (13:45 GMT), especially the Prices Paid inflation reading, and the University of Michigan final consumer sentiment
Next week: the Fed on October 28, the UK Budget the same day, the ECB on October 29, and the BoJ meeting
US PCE inflation and advance Q3 GDP on October 29, the US midterms on November 3, and the BoE on November 5
Iran headlines, which can move oil, yields, and the Dollar quickly
Bottom line: The Dollar is sliding because yields are falling and the Fed wants to wait, but Sterling and the Yen are getting the real benefit, and the Euro still can't escape France.
This article is for informational and educational purposes only and does not constitute financial or investment advice. Trading involves risk of loss — always do your own research before making any decisions.
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