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Hello everyone, today XM Forex will bring you "[XM Forex official website]: The strength of US dollar 'soft data' hides crises, beware of excessive pricing in the vacuum of 'hard data'!". Hope this helps you! The original content is as follows:
On Wednesday, as economic data eased concerns about the U.S. economy and labor market, prompting investors to weigh the possibility of the Federal Reserve cutting interest rates again this year, the U.S. dollar index fluctuated above the 100 mark. As of now, the U.S. dollar is quoted at 100.02.
The debate on the tariff case at the U.S. Supreme Court opened. The conservative chief justice and others questioned the rationality of the tariffs, and Trump's probability of winning the case was reduced. Bessant is optimistic about winning the case.
ADP employment in the United States increased by 42,000 in October, the largest increase since July 2025, higher than market expectations of 28,000. The U.S. ISM non-manufacturing PMI recorded 52.4 in October, a new high since February 2025.
The Democratic Party easily defeated the Republican candidates and won the gubernatorial elections in Virginia and New Jersey. Trump blamed the election defeat on the government shutdown, and then called for an end to the "long debate." He also said that U.S. stocks will reach new highs, and GDP growth in the third quarter is expected to be 4.2% or higher.
The two Democratic leaders wrote to Trump seeking face-to-face negotiations, but Trump still insisted not to negotiate with the Democrats until they voted to restart the government. Due to the shutdown, capacity at 40 major airports in the United States will be reduced by 10%.
Fed Governor Milan: It is still reasonable to continue to cut interest rates; (comments on ADP) The job market trend before the government shutdown seems to still exist.
PuBeijing: If the United States resumes nuclear tests, Russia will take reciprocal countermeasures; Russian Chief of Staff Gerasimov: Washington is planning to conduct nuclear tests, and Russia must immediately prepare for nuclear tests.
Kremlin: Putin and Trump have no plans for dialogue in the near future.
ANZ Bank: The Reserve Bank of Australia may choose to cut interest rates by 25 basis points before this node...
In our view, Australia's censored average inflation data in the third quarter is likely to be a temporary phenomenon. A number of factors support this judgment: price and cost indicators in business surveys show easing pressure, the seasonal pattern of higher third-quarter inflation readings in recent years is weakening, labor market conditions are gradually easing, the trade-weighted index of the Australian dollar is strengthening, and the recent downward trend in oil prices. Overall, based on various inflation indicators and influencing factors, inflation is likely to moderate in the www.rdsty.cning year. Nonetheless, the probability of inflation remaining above the 2.5% midpoint is higher than the probability of falling below that level, and a return to the extremely low inflation environment before the epidemic is extremely unlikely. This dynamic, coupled with the recent modest increase in unemployment and signs of weakness in leading indicators such as the ANZ-Indeed Australian job ads series, lead us to expect that the most likely path for monetary policy is a 25 basis point rate cut in the first half of 2026.
BNP: Why did the Federal Reserve decide to end this round of quantitative tightening?
No matter what the Fed’s future stance on monetary policy is, it has already launched a balance sheet reduction plan (quantitative tightening). The main risk of these programs is that they could lead to a tightening of U.S. dollar liquidity by depleting the Fed reserves that www.rdsty.cnmercial banks need to meet Basel III liquidity requirements. The Fed’s first quantitative tightening experiment in 2019 failed precisely because of this. Out of caution and a lack of clear judgment on the optimal size of reserves, the Fed set a goal of halting its second quantitative tightening at the first sign of real tension in money markets. According to the plan, this round of QT will end on December 1.
Short-term market interest rate trends indicate that the Fed's capital pool is no longer abundant. The cost of accessing liquidity has increased in recent weeks: the median overnight funding rate continues to exceed the reserve rate and is close to or even above the Fed's discount window rate. Withdrawals of liquidity from the Fed through the Standing Repo Facility are becoming increasingly frequent.
According to its operating framework, the Fed will maintain a stable balance sheet size for a period of time. Subsequently, in order to ensure that the supply of reserves remains at a level that it considers to be "adequate" (probably about 9%-10% of GDP), it will expand the balance sheet again. By 2026, its monthly Treasury purchases could reach $25-30 billion (in addition to $15-20 billion from the reinvestment of principal held in mortgage-backed securities) to maintain a balance sheet equivalent to 20% of GDP.
But we think the Fed should be morecautious. Large banks' ability to access the Fed's liquidity remains limited, and its liquidity delivery facility only addresses one flaw: Since the end of June, the opening hours of the standing repo facility have been more consistent with market participant needs. But two other shortcomings—the lack of a centralized clearing mechanism for the Fed’s repo loans and the possible stigmatizing effects of using the facility—remained.
Recent market changes have also highlighted that effective interest rates are no longer appropriate for assessing money market lending conditions and ensuring the smooth transmission of monetary policy. In early October, the Federal Reserve judged that reserves were still sufficient based on the interest rate's extremely low elasticity to fluctuations in total reserves. In addition, despite the apparent tension in the repurchase agreement market, borrowing levels in the federal funds market have remained moderate, and the median interest rate, although rising, remains at a favorable level (below the reserve rate). As Dallas Fed President Logan suggested, it may be time to adjust the measurement tools.
Fanon Credit: It is expected that the Federal Reserve will stop cutting interest rates in 2026, and the yield curve may maintain... pattern
We have recently updated our outlook for US dollar interest rates. Based on the judgment that the Federal Reserve will stop cutting interest rates in 2026, we expect yields to show a moderate upward trend. www.rdsty.cnpared with the market's current pricing of approximately 70 basis points of interest rate cuts in 2026, our macro forecast stance is more hawkish. Although the labor market has shown signs of weakness, most FOMC members still expressed concerns about continued high inflation.
We expect that the yield curve will maintain a range-bound pattern for most of 2026, with a tendency to flatten in the first half of the year. Although long-term yields may rise, they are expected to remain below 5.00% due to the www.rdsty.cnbination of continued support from pension demand funding flows, the Treasury Department's divestiture operations, and improvements in pension adequacy ratios. The main risk to our call for curve flattening is that more administration-leaning appointments to the Fed's Board of Governors could lead to a structural shift in monetary policy to the dovish side.
The Federal Reserve announced at its interest rate meeting on October 29 that it would end its balance sheet reduction (QT) early on December 1, earlier than market expectations, mainly to ease pressure on the repurchase market. In terms of specific operations, the Federal Reserve will roll over the principal of all maturing Treasury bonds and reinvest the principal of all maturing MBS in Treasury bills through the secondary market. We believe that stopping QT will help provide effective support for front-end interest rates and the repo market.
Mizuho Bank: The Bank of Japan is still expected to raise interest rates in December, and the depreciation of the yen will not affect the path of interest rate hikes for the time being
At the recent US-Japan summit, the United States tried to tactfully dissuade Japan from artificially lowering the yen exchange rate, but did not directly urge Japan to raise interest rates to guide the appreciation of the yen. It seems unlikely that the U.S. will oppose the Bank of Japan's decision to pause interest rate hikes if inflation falls below its 2% target. At the same time, the United States has not asked Japan to further increase defense spending, which may help ease concerns about fiscal expansion.
On the other hand, the Bank of Japan’s October monetary policy meetingThe meeting lacked hawkish signals: Although the Bank of Japan did not rule out the possibility of raising interest rates in December, there were few signs that the possibility of raising interest rates increased. We still expect the Bank of Japan to raise interest rates at its December monetary policy meeting for two reasons: (1) the outcome of the October meeting did not rule out the possibility of a rate hike; (2) the Bank of Japan did not make it clear that it was about to raise interest rates in its last meeting. We assume that the frequency of benchmark interest rate hikes is once every six months, that is, the most likely time point next year will be June 2026, by which time we believe that the inflation rate may have dropped below 2%. While the baseline forecast remains unchanged, there is now a slight chance that the rate hike will be postponed to January or later. If inflation falls below 2% sooner than expected, the rate hike may even be canceled. Regardless of the timing of the rate hike, we reiterate that our overall expectation of “at most one more rate hike” remains unchanged.
The current U.S. dollar-yen exchange rate may rekindle concerns about the impact of a weak yen on inflation. Nonetheless, as long as USD/JPY remains at or below mid-150, we do not believe the exchange rate will significantly push up inflation over the next year. Therefore, we do not expect the recent decline in the yen to have a significant impact on the Bank of Japan's future interest rate hike path.
Mitsubishi UFJ: How will the backlog of data and the US Supreme Court hearing affect the dollar?
The U.S. dollar index rose above the 100 mark yesterday, and the euro against the U.S. dollar fell below the important psychological level of 1.15, but the technical break has not yet triggered accelerated U.S. dollar buying. The U.S. government shutdown has lasted for 36 days, setting a record for the longest period in history. However, there are positive signs in the market that there may be an agreement to restart the government, including signing a short-term spending bill and passing part of the annual appropriation bill. If a deal is reached by the end of the week, the backlog of employment data will be released. If the labor market remains weak in recent months, it may prompt the market to reduce recently established long U.S. dollar positions.
Today’s focus is on the U.S. Supreme Court’s hearing on whether invoking the International Emergency Economic Powers Act (IEEPA) applies to global reciprocal tariffs. The hearing will start at 23:00 Beijing time and will last a total of 80 minutes, of which 40 minutes will be spent by the U.S. Attorney General defending the legality of the tariffs, while private enterprise plaintiffs and the 12-state alliance will each have 20 minutes to state their objections. The market currently generally believes that the tariff proposal will be rejected, although the Trump administration has prepared "Plan B", including the implementation of industry-targeted tariffs through Article 232 (national security), Article 301 (anti-unfair trade) and Article 201 (preventing surge in imports). If today's hearing does go in the direction expected by the market, it is expected to increase policy uncertainty and potentially reverse the recent dollar rally.
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