Global FX Monthly Outlook

To be steered by the outcome and tone of the US FOMC meeting

All eyes on the upcoming Fed meeting for signs of a dovish pivot, which would further weaken the USD

The recent weakness in the USD, with the DXY retreating from a high of 114.1 on Sep 27 down to 110.8 by Oct 31, primarily stems from market expectations that the Fed would soon ease its aggressive rate hikes. Although a 75 bps hike at the upcoming US FOMC meeting (Nov 1 – 2) is almost a certainty, markets have pulled back projections for similarly large hikes going forward. Based on Federal Funds Futures, traders are now pricing in a 46.7% probability of a 50 bps hike in December, down from 51.8% a week ago. Likewise, the policy-sensitive 2Y UST yield fell to a twoweek low of 4.274% on Oct 27, signalling a shift in expectations.

However, there is a still a possibility that the Fed could maintain its aggressive tightening stance. The Fed’s preferred gauge of inflation, the core PCE price index, climbed to 5.1% in September (Aug: 4.9%), remaining well above the 2.0% target and indicating that underlying inflationary pressures persist. Furthermore, the preliminary reading of US GDP in 3Q22 showed a return to growth (2.6%; 2Q22: -0.6%), which may suggest the Fed can maintain its hawkishness. Hence, should the Fed reiterate its aggressive stance instead, the USD will likely return to an uptrend.

As such, the upcoming Fed meeting will be key to the dollar’s direction as investors await any change in tone by Chairman Jerome Powell. Afterwards, focus will be on the US Non-Farm Payrolls report (Nov 4), with markets expecting a slowdown of only 190.0k jobs added in October (Sep: 263.0k) and a slightly higher unemployment rate of 3.6% (Sep: 3.5%). If such expectations are met it could bolster the Fed’s dovish pivot and weaken the USD.