Gold prices slid below $4,000/oz amid profit-taking on Gaza ceasefire
The US dollar continues to rally, with political events in France and Japan weighing on the two largest components of US Dollar Index (DXY) – EUR and JPY. Today’s deadline to form another government in France bears downside risks for the EUR, but the dollar run looks overdone, and dovish-leaning Fed minutes could trigger a correction. Elsewhere, the RBNZ surprised with a 50bp cut
USD: US Story Doesn’t Justify Such a Strong Dollar
The dollar’s strong performance since the start of the week has largely stemmed from negative political developments weighing on the euro and yen. These two currencies make up 71% of the DXY index, which is now at its highest since early August.
The ongoing US government shutdown – still showing no signs of resolution – is not a dollar-positive in itself, but remains the lesser evil compared to the political woes in France and Japan. It’s also doing the dollar a favour by suspending speculation around job market deterioration.
The big winner, anyway, remains gold, which has hit the historical $4,000 mark, and our commodity strategists see further room to run.
Today’s FOMC minutes from the September meeting can test the dollar’s bullish momentum. The widespread perception when the Fed cut rates was that the statement and Dot Plot projections were dovish-leaning, but Fed Chair Jerome Powell’s press conference added a layer of cautiousness, defying expectations to signal a pre-set path for back-to-back cuts.
The minutes will tell us where the consensus sits within the FOMC on rates, jobs and inflation. One source of downside risk for the dollar is any support for a 50bp cut. Only Stephen Miran voted for it, and Powell said there was “no widespread support” for a half-point move, but were there other members openly discussing it?
When we look at the OIS-implied Fed pricing, our perception is that it’s still too cautious on easing, and we see most of the upcoming US events as bearing risks of dovish repricing and USD weakness. 45bp of easing is discounted for December, but pricing is quite conservative beyond that, with 67bp in total by the end of 1Q26. That’s where we can see some action in terms of dovish repricing.
Aside from the Fed minutes, great focus will remain on any US shutdown news. Given how little the dollar has suffered from it, we think any indications of constructive interparty talks can yield only moderate and short-lived support for the greenback.
EUR: France Remains in Focus Today
The outgoing French prime minister has been asked by President Macron to give one final shot at bringing together the deeply divided parliament and form a government that can deliver on urgent budget issues. The deadline is set for tonight.
Should talks fail, snap elections may well become the base case, with also an increased risk of Macron resigning too, although the latter is way less likely. Betting markets place a 60-65% probability of legislative elections being called by the end of next week, and only 15% of Macron’s presidency ending before year-end.
If snap legislative elections are called, we could see another ~0.2-0.5% knocked off EUR/USD as it would imply a delay in budget decisions and could add pressure on OATs. The formation of a new government today may not yield huge benefits to the euro, considering the fragility of any political agreement at this stage.
But based on our view that the dollar will face downside risks with today’s Fed minutes and the USD rally looking a bit overdone in general, we think EUR/USD back at 1.170 is more likely than a test of 1.150 in the coming days.
NZD: RBNZ to Cut Again After 50bp Move
The Reserve Bank of New Zealand surprised with a 50bp rate cut today. Furthermore, guidance remained dovish, signalling openness to further reductions, resulting in a 1% drop in NZD/USD.
We are quite surprised by the decision, as we thought the lack of inflation data for the third quarter would warrant more caution with cuts this month. Instead, it appears that the RBNZ is firmly focused on supporting economic activity, and the larger-than-expected 2Q GDP contraction was enough to trigger an outsized cut.
We now expect a 25bp cut in November to 2.25% and a good chance of a follow-up reduction to 2.0% in early 2026. We think NZD/USD still has some room to recover on the back of our bearish USD call this quarter, but on the crosses it may keep lagging its closest peer AUD.
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