FX View Fed, BOE and BoJ ahead, but an AI safety wobble to start the week

FX View Fed, BOE and BoJ ahead but an AI-safety wobble to start the week.

Kit Juckes Three central bank policy decisions (Fed, BOE and BoJ) dominate the market diary this week, but the stalemate in the Gulf, the Houthi advance and fears about the safety of embracing AI as fast as the world seems to be, are responsible for this morning’s FX trends. The upshot of those is a stronger dollar, with NZD, AUD and JPY the biggest G10 losers and ZAR, MXN also weaker. The latest CFTC data, which shoes a shrinking USD long overall, counts NZD and JPY as the only G10 currencies where the futures market is long, and the AUD short was shrinking a week ago. ZAR and MXN positions are also long. So, some risk-off and some longs being cut back to start the week, amid even more geo-political uncertainty.

The chart shows (in basis points) how much is priced for this week’s rate moves. A ‘done deal’ on Friday for the BoJ means they will have to be very hawkish to avoid some more profit-taking by yen longs. We might yet get another chance to go short USD/JPY at 160. The market’s pricing of the FOMC meeting at 22bp, which reflects a little bit of doubt, sparked by Christopher Waller, ahead of revisions to the PCE deflator. The majority view is that the new Fed Chair has painted himself into a corner, the economy is strong, inflation is too high and a hike is needed.

As for the BOE’s MPC , the consensus view is that they will wait for November 5, after the Budget (which is on October 28 and will have more impact on the economy and the pound than the BOE meeting. That said, conjuring up a budget which shows enough fiscal restraint to avoid scaring the Gilt market, without casting doubt on a November rate Hike, will take some doing.

Canadian CPI is the today’s most notable data point, with headline inflation expected to stay at 3%, while the ex-food and energy measure rises to 2.1% from 1.9% and trimmed core remains at 1.9%. That doesn’t suggest urgency to hike rates amid tariff uncertainty, though the market does price a hike by year’s end with more to come next year. The bigger focus is likely to be on real economy data as we assess the impact of tariffs.