Growth-supporting currencies have struggled recently, but upcoming economic data and central bank meetings are expected to cap further gains in the US dollar, UBS noted while providing insight into recent currency market movements.
UBS’s observation came after the US dollar (DXY index) rebounded after failing to break the 100 level.
Analysts noted that the US dollar’s decline was paused this week due to several factors, including the growing conflict in the Middle East, the upcoming US presidential election, and weaker economic indicators from Europe. These elements have provided support to the US dollar, indicating that its recent weakness may have been exaggerated.
UBS expects the market to closely monitor European economic data such as retail sales, German manufacturing orders and industrial production next week. Particular attention will be paid to UK economic indicators, including industrial production, trade and employment figures, as well as possible hints from the Bank of England about faster interest rate cuts.
In the United States, the focus will be on the labor market report scheduled for release on Friday and inflation numbers for September. UBS notes that if other major economies are an indication, the risk of US inflation data could be on the lower side, which would boost expectations of a US interest rate cut and possibly put pressure on the dollar.
Furthermore, UBS commented on expected actions from other central banks. The Reserve Bank of New Zealand (RBNZ) is expected to cut interest rates by 50 basis points in response to recent business surveys indicating potential economic weakness. The move has already been factored into market prices, but the New Zealand Dollar (NZD) is expected to perform poorly due to the expected continuation of weak domestic data. As a result, UBS prefers the Australian dollar (AUD) over the New Zealand dollar.
Finally, UBS noted that although emerging market currencies had a weak start to October, they had previously been higher since late July. The Mexican peso has been highlighted for its strength following market-friendly comments from newly sworn-in President Claudia Sheinbaum. On the other hand, the Israeli is facing pressure amid the escalating conflict in the Middle East, with the Bank of Israel expected to maintain the interest rate at the next meeting.
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