Forex Today: Major pairs fail to break out after Fed, eyes on ECB and key US data

Here is what you need to know on Thursday, October 29:

Major currency pairs struggle to find direction on Thursday after the Federal Reserve's (Fed) policy decisions and Chair Kevin Warsh's comments on the outlook failed to trigger a significant market reaction. The European Central Bank (ECB) will announce its meeting outcome later in the day and the US economic calendar will feature the first estimate of the third quarter Gross Domestic Product (GDP) growth and the Personal Consumption Expenditures (PCE) Price Index data, the Fed's preferred gauge of inflation, for September.

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US Dollar Price This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the New Zealand Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.68%	0.37%	0.49%	-0.35%	-0.06%	1.40%	0.49%
EUR	-0.68%		-0.33%	-0.21%	-1.05%	-0.82%	0.65%	-0.25%
GBP	-0.37%	0.33%		0.04%	-0.77%	-0.48%	1.04%	0.05%
JPY	-0.49%	0.21%	-0.04%		-0.80%	-0.61%	0.94%	-0.09%
CAD	0.35%	1.05%	0.77%	0.80%		0.24%	1.70%	0.83%
AUD	0.06%	0.82%	0.48%	0.61%	-0.24%		1.48%	0.36%
NZD	-1.40%	-0.65%	-1.04%	-0.94%	-1.70%	-1.48%		-0.93%
CHF	-0.49%	0.25%	-0.05%	0.09%	-0.83%	-0.36%	0.93%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

The Fed left its policy rate unchanged at 3.75%–4.00%, as anticipated. In the post-meeting press conference, Chair Warsh reiterated their commitment to achieve price stability but refrained from signalling a rate increase in December. Nonetheless, the CME FedWatch Tool currently shows that markets are pricing in about an 83% probability of a 25 basis points hike in interest rates at the last meeting of the year, compared to about 80% before the Fed meeting. After losing 0.2% on Wednesday, the US Dollar (USD) Index trades marginally higher on the day above 102.20, while the benchmark 10-year US Treasury bond yield holds steady at around 5%. Finally, US stock index futures trade mixed, with the Nasdaq Futures and S&P losing 1.2% and 0.4%, respectively, while Dow Futures rise about 0.4%.

Fed Chair Warsh’s press conference tone was firmly hawkish, with the 7/10 FXS Speechtracker score in line with the historical average, signaling consistent resolve on inflation. The emphasis that “ensuring price stability is not about a fixed date on a calendar” and the insistence on “no ifs and or buts, we will deliver price stability” highlighted a data-dependent but uncompromising stance, reinforced by references to “new monetary medicine,” reduced accommodation in September, and improving inflation expectations.

The FXS Fed Sentiment Index rose by +14.39 points to 141.89 after the Fed event, standing firmly in hawkish territory and well above the neutral 100 threshold. This sharp move higher reflects markets internalizing Warsh’s message that the Fed’s tightening stance is biting, inflation expectations are “going the right way,” and there is no tolerance for a “soft” inflation target, a backdrop typically supportive of the Dollar and a headwind for risk-sensitive currencies.

Fed pause keeps Dollar underpinned as OCBC flags limited upside

Analysts at OCBC highlight that, “despite a strong economy and sticky inflation,” Fed policymaker Kevin Warsh “pushed back against the idea that the economy is running too hot,” while emphasising that “incoming data will determine the next move.” OCBC’s takeaway is that “Warsh remains willing, but not eager, to tighten further,” and the bank reiterates that it “continue[s] to expect a second and final 25bp hike in December.”

In their view, “the risk of further Fed tightening should keep the USD supported,” but they “see limited scope for a sustained dollar rally unless underlying inflation continues to surprise to the upside.” OCBC adds that “after the Fed pause, the Bank of Canada hike and the RBNZ surprise hold, attention now turns to the ECB,” with the evolving global policy backdrop set to shape the Dollar and Euro outlook in the weeks ahead.

The ECB is expected to leave key rates unchanged. President Christine Lagarde's comments on the policy outlook, especially in the face of fiscal uncertainty in France, could influence the Euro's valuation in the second half of the day. At the time of press, EUR/USD was trading near 1.1140, losing about 0.15% on the day.

USD/CAD lost about 0.4% on Wednesday after the Bank of Canada (BoC) announced that it raised the policy rate by 25 bps to 2.5%. BoC Governor Tiff Macklem noted that there there is no pre-determined path for rates but added that even after the rate increase, the policy rate is low enough that is does not restrain growth. Early Thursday, USD/CAD stays in a consolidation phase at around 1.4000.

GBP/USD closed marginally higher on Wednesday and snapped a three-day losing streak. In the European session on Thursday, the pair moves sideways above 1.3300.

USD/JPY registered small losses on Wednesday before stabilizing below 158.00 on Thursday.

Gold stays on the back foot early Thursday and trades in negative territory below $4,050 after closing virtually unchanged on Wednesday.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.