Last Week in Review

Last week, the Federal Reserve cut interest rates by 25 basis points, but delivered a slightly more hawkish tone than markets expected. Retail traders sold the US dollar, while professional investors stepped in as buyers. Meanwhile, the meeting between Trump and Xi Jinping eased trade tensions and led to new agreements with Thailand, Malaysia, and Cambodia. In the UK, markets awaited a crucial Bank of England decision, while the prolonged US government shutdown disrupted the economic calendar.

In Asia, the Reserve Bank of Australia is expected to keep rates unchanged, and Japan continues to struggle with a weak yen and verbal interventions. Nevertheless, the ongoing US dollar strength and relative stability in global equity markets suggest that investor risk appetite has not vanished, though caution has increased.

Key Highlights

  • The Federal Reserve delivered its third rate cut of the year but adopted a less dovish tone than before.
  • US trade agreements with China and three additional Asian countries created a temporary positive market sentiment.
  • The US government shutdown entered its longest period yet, disrupting macroeconomic data releases.
  • The British pound reached its lowest level since April ahead of a crucial Bank of England meeting.
  • The Japanese yen weakened to an eight-month low, raising concerns about potential intervention.
  • Gold continues to struggle to reclaim the $4,000 level.
  • The US Dollar Index (DXY) consolidated at a two-month high.

Market Review

Last week presented a mix of positive news and mixed signals from central banks and policymakers. As expected, the Fed cut rates by 25 basis points, but Chair Jerome Powell emphasized that a December cut is “not guaranteed.” This statement tempered expectations for an overly accommodative monetary policy, strengthening the US dollar quickly.

Separately, the Trump-Xi meeting produced a temporary trade agreement that reduced tariffs in certain sectors, reigniting hopes for constructive negotiations. The US also signed separate trade deals with Thailand, Malaysia, and Cambodia. Although details remain scarce, these deals were broadly perceived as a positive step toward easing global trade tensions.

In equity markets, the so-called “Magnificent 7” tech giants posted stronger-than-expected earnings, pushing US stock indices to a third consecutive week of gains. However, the Fed’s cautious tone, rising Treasury yields, and the ongoing US government shutdown limited market optimism.

In Europe, the ECB kept rates unchanged, with President Christine Lagarde stating that “monetary policy remains appropriately positioned.” Yet, weak economic data from the Eurozone pushed the euro down 1.8% against the dollar. In the UK, the pound fell to its lowest level since April amid expectations of a rate cut and concerns over the autumn budget.

Market Outlook – Week Ahead

As markets digest last week’s shocks, traders face a dual challenge: incomplete economic data due to the US government shutdown and increased uncertainty from a more cautious Fed. The DXY remains at a two-month high, while equity markets show modest bullish tendencies amid limited volatility.

In the short term, markets are largely in a holding pattern. The absence of official data such as US Non-Farm Payrolls (NFP) and inflation figures has shifted focus to private reports like ADP and ISM indices. Key upcoming events include Bank of England policy decisions, the Reserve Bank of Australia’s rate announcement, and Chinese trade data, all of which could influence currency flows.

Despite easing trade tensions and strong tech equity performance, traders remain cautious. Historical experience shows that periods of “trade peace” are typically short-lived, with markets quickly swinging from risk-on to risk-off. As a result, the US dollar continues to act as a safe-haven asset, while gold and the yen reflect this underlying caution.

Key Drivers This Week

United States

The US economic calendar may be lighter than last week, but potential risks remain significant. With official data lacking, Fed officials’ statements are the primary market driver. Investors closely monitor FOMC comments for hints of a potential December rate cut. Hawkish remarks could further support the dollar, while weak private indicators (ISM, ADP) may temporarily offset this effect. Overall, the dollar’s safe-haven status remains intact, supported by ongoing global uncertainties.

Europe

Attention shifts to the Bank of England meeting on Thursday. Higher-than-expected inflation and wage growth have left the probability of a rate cut uncertain. Forecasts suggest a close 5-4 vote in favor of holding rates steady. A dovish tilt or indications of a December rate cut could exert further pressure on the pound.

Asia

The RBA announces its rate decision on Tuesday, with rates expected to remain unchanged. Seasonal inflation above 2.5% has reduced the likelihood of a near-term cut. Chinese trade data later in the week could influence global risk sentiment; weaker exports or imports may signal a slowdown in the world’s second-largest economy.

In Japan, household income and spending data will be released. Signs of improving domestic consumption could increase pressure on the BoJ for gradual policy normalization. Meanwhile, persistent yen weakness and USD/JPY above 154 maintain the likelihood of verbal interventions by authorities.

Overall, the week ahead combines data silence, cautious central bank stances, and geopolitical factors, all of which could trigger sudden currency volatility. Markets may appear calm, but underlying positioning suggests readiness for the next move.

 

Currency Outlook

🇺🇸 US Dollar (USD)

The USD is influenced both by Fed policy and a lack of official economic data. After the 25 bp rate cut, Powell emphasized that a December cut is not guaranteed, surprising markets and neutralizing dovish expectations. This cautious stance drove the DXY to a two-month high.

In the absence of official releases, attention shifts to private indicators such as ISM and ADP. Weak readings could raise expectations for a December cut, temporarily pressuring the dollar. However, the broader view remains supportive as the Fed positions itself as data-dependent rather than committed to further easing.

🇪🇺 Euro (EUR)

The euro was one of last week’s major losers. The ECB maintained its policy stance, but Eurozone economic data showed weakening growth. Manufacturing PMIs fell below 50, and inflation slowed. This structural weakness, combined with the Fed’s cautious tone, led to a 1.8% euro depreciation against the dollar. Short-term trading is likely range-bound between 1.15–1.18, with the overall bias downward unless new data shows industrial or inflationary recovery.

🇬🇧 British Pound (GBP)

The pound struggled, hitting its lowest level since April ahead of the BoE meeting. Despite moderately positive inflation and wage data, UK political and fiscal uncertainties weigh heavily. Markets fear the autumn budget may include significant tax increases, potentially hindering fragile growth. A 5-4 vote is expected to hold rates steady, but dovish members may push for cuts. Until political clarity emerges, GBP remains under downward pressure and volatile.

🇨🇦 Canadian Dollar (CAD)

The Bank of Canada cut rates by 25 bps last week but signaled satisfaction with current levels, limiting further easing. Economic data remains mixed, with industrial growth negative in August and a weak labor market. Mid-term outlook could improve with federal infrastructure spending aimed at reducing reliance on the US market. CAD’s short-term trend is slightly positive, though medium-term direction remains neutral unless employment or trade data disappoint.

🇯🇵 Japanese Yen (JPY)

The yen was among October’s weakest currencies. USD/JPY reached an eight-month high due to a more hawkish Fed and the BoJ’s continued ultra-loose policy. Japanese authorities issued verbal warnings but have yet to intervene. Upcoming household income and spending data could increase pressure for policy change if consumption rises. Overall, JPY remains weak and risky unless unexpected interventions occur or geopolitical tensions drive safe-haven flows.

🇦🇺 Australian Dollar (AUD)

The AUD shows relatively balanced conditions. The RBA is expected to hold rates steady, with recent inflation above target reducing near-term cut prospects. Combined with improving US-China trade relations, this creates a mildly positive backdrop for AUD. Domestic labor market weakness remains, but as long as wage growth and inflation stay above target, the RBA is likely to wait. Positive Chinese trade data could further support AUD. The near-term outlook is neutral to slightly bullish, particularly against currencies under policy or political pressure such as GBP and EUR.

Economic Calendar – Week Ahead

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Summary

Last week highlighted markets navigating between optimism and caution. The Fed’s cautious rate cut, easing trade tensions, and strong tech sector performance kept the USD as a safe-haven, while investors reacted cautiously to market movements. Short-term dynamics are constrained by limited macro data, the Bank of England meeting, and Asian central bank policies. Currency outlooks suggest supportive conditions for the dollar, downward pressure on the euro and pound, and continued yen weakness, while the AUD and CAD show relative stability. Overall, the coming week is expected to be relatively calm, though poised for sudden market moves.