USD
The dollar fell to its weakest level in a month on Wednesday as the midterm fallout combined with a collapse in oil prices. With Democrats taking both the House and Senate, markets concluded that pressure on the White House to wind down the war with Iran will build, reinforced by Vice President Vance blaming the conflict for Republican losses and President Trump saying he had no immediate plans for further strikes. duly crashed almost 9% to settle at near$95, dragging lower in turn, with the closing down 0.5% at 101.4. ADP, meanwhile, beat at 86k, but ISM services softened to 54.5, leaving December Fed hike odds close to 75%. We cautioned at the start of the week that dollar dips should stay shallow, and we think that still holds: Tehran insists both sides remain far apart, Qatar is awaiting a response within 36 hours, and the risk premium could return quickly. Today brings jobless claims, Q3 unit labour costs, and remarks from Hammack and Barkin, though the bigger test is Friday’s payrolls, where we see risks skewed to the upside.
EUR
was the main beneficiary of Wednesday’s dollar sell-off, climbing to the high-1.12s before dipping this morning, having failed to hold 1.12 a day earlier. As we flagged yesterday, this was almost entirely a passive move: October flash HICP landed exactly in line with consensus, with headline inflation rising to 4.0% from 3.8% while core held at 2.5%. The detail confirmed that the Middle East energy shock remains the dominant story, but core and ex-energy measures were unchanged, with little evidence of broadening second-round effects. That leaves a December ECB hike roughly 85% priced, and in our view the print adds little new impetus for the euro either way. More important is the oil move. Brent back below $95 is a meaningful relief for an energy importer, and if sustained would ease the stagflationary squeeze that drove the euro to a 1.5% loss in October. We remain sceptical that it will be, however, given Iran’s negotiators are playing down the prospect of a quick deal, and the Hormuz plan is far from agreed. With a quiet eurozone calendar today, EURUSD should trade on oil and the dollar, and we remain biased to fade any moves higher.
GBP
Sterling closed at just under 1.35 on Wednesday, its strongest since mid-September, but as with the euro, this had little to do with UK fundamentals and everything to do with the dollar. All eyes now turn to the Bank of England at 12:00 GMT, where a 25bp hike to 4.00%, the first increase since August 2023, is around 95% priced in and is also our base case. We expect a 7-2 vote, with Dhingra and Taylor dissenting in favour of a hold, though our focus is on the accompanying guidance. Markets still price in nearly 100bp of tightening over the coming year, which we consider far too aggressive given soft underlying growth, 4.7% unemployment, and an inflation overshoot that is overwhelmingly an energy story. Yesterday’s near-9% drop in oil only strengthens the case for the MPC to hike cautiously and signal a December pause, and we expect the Monetary Policy Report to frame the move as insurance rather than the start of a cycle. If correct, ’s pre-meeting gains should be vulnerable.
CAD
The loonie rallied to a seven-week high on Wednesday despite the slump in crude, with touching 1.3930 before settling near 1.3965, as broad dollar weakness and narrowing US-Canada yield spreads trumped the oil move. Indeed, we continue to think the Bank of Canada’s October hike to 2.50% was premature, a view that Wednesday’s collapse in Brent below $95 reinforces, given the Bank’s own rationale was almost entirely an energy story. If oil fails to recover, the roughly 50% probability still attached to a December follow-up should fade, and with it the loonie’s rate support. With no Canadian data today, USDCAD should take its cue from Gulf headlines and the broader dollar, ahead of Friday’s labour force survey, where consensus looks for a 12-15k gain in employment. A soft Canadian print alongside firm US payrolls remains the most likely trigger for the move back above 1.40 ahead of the weekend.
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