The greenback rallied against every major currency except the yen and a handful of Latin American currencies. The latter continue to shine in 2023, whereas the former is rallying in hopes that high inflation readings will soon force the Bank of Japan to start reversing its ultra-loose monetary policy stance. The ECB meeting went exactly according to the script. The central bank went out of its way to avoid surprising markets, and it seems like it succeeded, given the common currency subdued reaction. This week promises to be quite volatile in currency markets. On Wednesday, the Federal Reserve meets, although the market expects neither a change in policy nor a significant shift in communications, as was the case with the ECB last week.

On Friday, we get the all important October labour market report from the US, where there have been few signs of cooling lately. Key Eurozone data will also be on tap, with the third quarter GDP report and the flash inflation report for October all due to come out on Tuesday. As if that were not enough, the Bank of England’s November meeting will be held on Thursday. A potential market mover will also be the quarterly refunding report from the US Treasury on Wednesday, which announces how much long-term debt will be sold over the next three months. What used to be a non-event has become much more important now that markets are fretting about the wall of public debt that needs to be sold to an increasingly sceptical market. The previous refunding report sparked the global rout in bonds, so traders will be keeping a keen eye on this one.

GBP: The November meeting of the Bank of England is in focus this week. Rates are universally expected to remain unchanged at 5.25%, and attention will instead be on the voting split and general communications to markets. Following the departure of hawkish member Haskel from the committee, no closer than a 6-3 voting split seems probable. The recent deterioration in UK economic activity data could also elicit a greater dovish shift in both the vote and the bank’s accompanying rhetoric. The committee may once again warn over the risk of a recession, albeit we don’t believe that this will be incorporated into the bank’s base case scenario for 2023. Financial markets have nearly priced out any chance of a hike for the remainder of the cycle, so there may be some pushback on the part of the MPC to retain at least the option of additional hikes in the curve. Given the very cheap levels at which sterling is trading, and the fairly dovish pricing in the short-term curve, there may be potential for a rebound in the pound.

EUR: After the PMIs of business activity for October showed yet another decline, the ECB could do little but stand pat and leave rates unchanged at its policy meeting last week. President Lagarde stuck to the script, acknowledging the weakening of the Euro Area economy and saying that geopolitical risks could weigh on growth. The Governing Council has kept its options open to raise rates again, although markets simply don’t believe that one will materialise, and are now pricing in the first rate cut in April next year. This week’s data will be crucial for the common currency. Third quarter Eurozone GDP is expected to print exactly at 0% on Tuesday, thus avoiding a contraction. On the inflation front, another pullback in core inflation is expected, to 4.2%. These numbers would be a partial relief to the ECB, justifying retroactively its decision to leave rates unchanged. If these predictions are realised, we could see a modest relief rally in the euro.

JPY: The yen traded above the 150 level on the US dollar last week, before recovering some of its losses, and ending the week as one of the better performers in the G10. Focus this week will be squarely on Tuesday’s Bank of Japan policy meeting. Speculation has grown that the BoJ will soon reverse its ultra-dovish policy stance, starting with an end to the bank’s yield-curve control (YCC) policy this week. While we think that this is a clear possibility, policymakers have been reluctant to tinker with the programme in the past, and may merely lift the target for 10-year Japanese government bonds closer to current levels. The BoJ’s updated growth and inflation forecasts will also be key this week, particularly should YCC remain in place. Any indication that the bank sees stronger growth and higher inflation than in July could support the yen, as markets price in a greater possibility of a first interest rate hike in early-2024. Tuesday will also see the release of the latest FX intervention data, which will give markets a better idea as to whether authorities are actively stepping in to prop up the Japanese currency.

CAD: As anticipated, the Bank of Canada left policy unchanged last week. Policymakers struck a relatively hawkish note on inflation in the bank’s accompanying communications. The BoC kept its options open to raise rates again up upcoming meetings, saying that ‘progress towards price stability is slow and inflationary risks have increased’. The central bank noted that inflation was set to remain persistently high at around 3.5% through mid-2024, and is now not expected to return to target until the end of 2025 (from mid-2025 in July). However, the Canadian dollar slumped to fresh 7-month lows above the 1.38 level on the USD following the announcement, as the BoC delivered a dovish assessment on growth. Investors believe the bank’s tightening cycle to be over, and CAD subsequently ended the week at the bottom of the G10 FX performance tracker. This week looks set to be a busy one, with GDP data (Tuesday), PMI figures (Wednesday) and the monthly labour report (Friday) to be interspersed by speeches from BoC members Macklem and Rogers.

CNY: Once again, the Chinese yuan ended last week little changed against the US dollar and roughly in the middle of the EM FX performance dashboard. A Reuters report on Monday that China was about to unveil an additional 1 trillion yuan worth of debt issuance kept the Chinese currency well bid on Tuesday. We view additional fiscal support (which includes raising the central government’s deficit ratio from 3% to 3.8%) as a small, albeit significant step in the right direction that could help allay concerns about China’s growth outlook. September industrial profit data released on Friday, which showed a second month of advances, further supported the view that the worst for the economy is over. Attention this week will focus on October’s business activity data, which may show signs of a further recovery in activity. The NBS data will be released on Tuesday, while the Caixin data will be released on Wednesday and Friday.