Forex Market Outlook: US Fiscal Deadline and Fed Commentary in Focus
Original Source: FXStreet, by Anil Panchal
Supplemented by market insights from Reuters, Bloomberg, and CNBC
Overview
The global foreign exchange (FX) market is navigating a landscape shaped by fiscal policy uncertainty in the United States, heightened anticipation around upcoming Federal Reserve comments, and broader macroeconomic data flows. As the week unfolds, investors are reassessing their positioning in major currency pairs amid concerns over short-term government funding in the US, signs of economic divergence across major economies, and speculation about the Federal Reserve’s future interest rate path.
Global markets have started the week on a cautious note, weighed down by the US Congress’s struggle to avoid a government shutdown, persistent inflation fears, and mixed economic data from around the world. Meanwhile, central banks keep policy flexibility at the forefront as growth indicators show uneven recovery paths.
Key Market Focus: US Fiscal Deadline
One of the main drivers of market sentiment currently is the US government’s imminent funding deadline. If Congress fails to pass a continuing resolution or an appropriations bill before mid-November, the federal government may enter another partial shutdown.
– House Speaker Mike Johnson has proposed a short-term continuing resolution to keep parts of the government funded until January and February 2024.
– The proposal is expected to hit the floor for a vote by midweek, ahead of the November 17 deadline.
– A shutdown could significantly impact GDP growth in Q4 2024 and delay key economic reports that traders rely on for macro insights (such as labor market data and inflation numbers).
– A shutdown historically causes risk-off sentiment, strengthening safe-haven currencies such as the US dollar and the Japanese yen while weakening more risk-sensitive currencies like the Australian and New Zealand dollars.
Federal Reserve Commentary Anticipated
Market participants are closely watching a slate of Federal Reserve speakers this week, who could offer new insight into the central bank’s policy trajectory.
– Fed Chair Jerome Powell will speak at a policy panel on Thursday (Nov 16), which is seen as one of the most significant Fed appearances before the December FOMC meeting.
– Other speakers on the calendar include Fed Governors Lisa Cook and Christopher Waller, along with regional presidents Thomas Barkin (Richmond Fed) and Susan Collins (Boston Fed).
– Investors are watching for signals about whether the Fed considers recent progress in tackling inflation sufficient to pause rate hikes definitively.
Market pricing via FedWatch from CME Group shows that investors currently assign an almost 90% probability that the Fed will keep rates unchanged in December. However, surprises in data or hawkish commentary could revive expectations of more tightening.
US Inflation Data in Review
The latest round of US economic data has provided mixed signals. Last week’s Initial Jobless Claims showed a slight increase, marking a potential cooling labor market, but not enough to suggest a significant deterioration. Consumers continue to spend, supporting GDP growth, but forward-looking inflation trackers show moderation.
Key inflation components:
– Consumer Price Index (CPI) data for October is scheduled for release on Tuesday, November 14.
– Markets expect headline inflation to ease slightly to 3.3% year-on-year, down from 3.7%.
– Core CPI (which strips out food and energy) is anticipated to hold steady at 4.1%.
– A softer-than-expected inflation print could solidify expectations that the Fed’s rate-hike cycle is complete.
– Conversely, any upside surprises could lead to volatility across stocks, bonds, and FX markets.
Dollar Index Holds Steady After Weakening
The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, is attempting a recovery near the 105 level.
– The DXY saw recent weakness after dovish-leaning comments from Fed Chair Powell at the IMF conference, where he reiterated that while the Fed remains ready to act if necessary, tighter credit conditions are helping slow inflation.
– Technical analysts from Bloomberg suggest that support
Read more on USD/CAD trading.