Is US exceptionalism back? US economy a notable outperformer. FOMC minutes confirm majority favoured a 50 bps cut, with a few preferring 25 bps

By Stuart Talman, XE currency strategist

The blowout September jobs report and last week's stronger than expected CPI data have been the two major developments for the market to digest over the past two weeks, both serving to pose the question: will the Fed potentially pause at one of the two remaining FOMC meetings for the year?

Stepping away from pricing in another 50bps cut before year-end, rates markets may continue to hawkishly reprice expectations for the near-term path of the Fed funds target rate should labour market and activity data continue to surprise higher whilst annualised core inflation remains sticky, above 3% (THUR's number printed at 3.2%).

While the majority of Fed officials who spoke following the CPI data were unfazed by the beat, the outlier was Atlanta Fed president, Raphael Bostic, commenting in a Wall Street Journal interview: I am totally comfortable with skipping a meeting if the data suggests that’s appropriate

The next 2 day FOMC meeting commences on 06 November, the day after the US presidential election and a few days after the October jobs report. The labour market data will inevitably be affected by Hurricane Milton as evidenced by this week's initial jobless claims data point climbing to its highest level in 14 months, influenced by late September's Hurricane Helene.

So, its plausible that given uncertainty created by cloudy labour market data, in addition to a potentially tight US election result still unknown by November 7th, Fed Chair Powell and his colleagues opt to pause before resuming the easing cycle in December, should two months of data warrant.

In this scenario, the US dollar likely remains bid, or at the very least holds its ground following its rebound that commenced on the final day of September.

Marking 14 month lows in the low 100.00's, the dollar index (DXY) gained close to 3% over a nine day trading span, peaking just shy of 103.20 during early morning trade, Friday.  Momentum indicators are now stretched, the RSI reading of close to 80 comfortably in overbought territory suggesting that the dollar's rally may have peaked in the near-term.

The major currencies traded within condensed ranges through Friday's sessions,  stronger-than-expected PPI and Michigan Consumer Sentiment data failing to induce a material directional change from the market. Gaining close to a quarter-of-a-percent, the New Zealand dollar was the second top performer amongst the G10, reclaiming territory north of 61 US cents.

We flagged 0.6050 as a critical NZD/USD support level earlier last week in addition to having the potential to be a pivot point given the midpoint of the August-September surge aligns with a level that has proven to be a major floor for the Kiwi on numerous occasions through the year.

Sure enough, the 0.6050 mark again proved its significance with both Wednesday and Thursday's lows logged within a few pips, before Friday's modest rally lifted NZD/USD back above the widely observed 200-day moving average. Price action consolidating above 0.61 this week is needed to confirm last week's lows can be labelled as a prominent swing low.

This week's open could be a softer one for the New Zealand dollar and other China-sensitive currencies, including the Australian dollar.

Over the weekend, China's Ministry of Finance held a highly anticipated press conference led by Finance Minister Lan Fo'an with many expecting a detailed fiscal stimulus package to be announced, including a dollar amount that would be unleashed to revive China's sputtering economy.

Over the weekend, China's Ministry of Finance held a highly anticipated press conference led by Finance Minister Lan Fo'an with many expecting a detailed fiscal stimulus package to be announced, including a dollar amount that would be unleashed to revive China's sputtering economy.

Whist Fo'an promised greater support for the struggling property sector and implied an increase in government spending to improve economic performance, the briefing underwhelmed, failing to provide a headline dollar figure for fresh fiscal stimulus that the market ultimately sought. In addition there was an absence of new policies to incentivise a step-up in consumption which along with the ailing real estate market has been the primary reason for the economy's underperformance.

The market's patience will be stretched as attention turns to this week's slew of activity data for the world's second largest economy, Friday serving up the trio of third quarter gross domestic product (following 2Q's dismal 4.7% reading), industrial production and retail sales. Beyond this week's data dump, the next major policy briefing occurs later in the month via the Communist Party's legislative meetings. At last year's edition, the National People’s Congress approved additional sovereign debt and raised the budget-deficit ratio.

Failure to deliver compelling fiscal initiatives may weigh on China-linked currencies, including the New Zealand and Australian dollars.

Given this week's quiet US calendar, the headline event presents via the European Central Bank's interest rate decision, the ECB widely expected to lower the deposit rate by 25 bps to 3.25% following a notable slowdown in eurozone business activity through September. Swaps markets assign a near 90% implied probability to the cut, therefore the market's reaction is likely to be influenced by the accompanying statement and Lagarde's press conference….which are likely to be light on forward guidance given the grief this caused earlier in the year.

Rebounding over 6% from the 05 August swing low a few pips below 0.5370, NZD/EUR peaked near 0.5720 on 30 September before paring around half this move over the past fortnight. A key resistance zone has formed at 0.5530/60 which must hold for the pair to retain its upside momentum. On the topside, the convergence of the 100-and 200-day moving averages either side of 0.5600 presents as a critical hurdle to clear to resume the pair's ascent.

It’s a busy week for UK data, the release of jobs numbers, CPI and retail sales all critical inputs in determining the Bank of England's move at the 07 November meeting. Market pricing currently calls for 35bps of BoE easing for the remainder of the year, assigning a 77% implied probability to a November cut.

The week's domestic headliner is Wednesday's third quarter CPI, the consensus forecast is for inflation to fall from 3.3% to 2.3%, thereby returned to the RBNZ's 1%-3% target band. Aussie jobs numbers drop the following day.

Will 0.6050 hold as the Kiwi extends further beyond 61 US cents or will the dollar defy the momentum indicators to extend its run higher?

Stuart Talman is Director of Sales at XE. You can contact him here.