AI bubble? Four Differences Today vs. 2000
Despite good ADP and ISM services data, the US dollar has corrected lower. With equities re-stabilising, the risks remain of further US dollar pullbacks after a rally that has exceeded what rate differentials can justify. Today, we see the BoE on hold despite mounting speculation of a pre-Budget cut. Norges Bank is likely to hold too, with low risks of guidance tweaks
USD: More Correction Risks
ADP payroll figures were good enough (42k vs 30k consensus) to keep markets in guessing mode about December’s Fed cut. ISM services were also stronger than expected. The dollar reaction was interestingly quite muted and was followed by a correction overnight. We read this as a signal that markets were already pricing in a good deal of positives in the USD, and that part of the dollar rally over the past couple of days was due to safe haven flows amid equity instability.
The dollar has clearly re-established some safe haven appeal, meaning more equity corrections can still benefit USD against activity currencies. But the yen remains the preferred defensive tool in FX now. Japanese officials have continued to test the waters with verbal intervention, but without follow-through, such efforts tend to lose impact over time. If some risk-off fails to come to the rescue for the yen, expect more upward USD/JPY speculation to test the Bank of Japan’s tolerance band (with 155.0 as the obvious target).
While we note signs that the dollar rally is running out of steam, it’s equally true that markets are lacking a compelling story to rebuild dollar shorts. The lack of data and a cautious Fed communication means there aren’t many in sight. We expect some rangebound trading today, with lingering risks of correction in the dollar based on short-term overvaluation. We also have Challenger job cuts data today, which could surprise on the negative side for the dollar and add fuel to the correction.
Finally, the Supreme Court’s review of the Trump administration’s tariffs is drawing significant attention. We discuss this here, and our baseline is that tariffs will stay regardless of the ruling.
EUR: Still Cheap
EUR/USD is trading well within undervaluation territory, as the dollar rally has extended beyond what can be justified by short-term drivers suvh as rate differentials and equities. With the current spot (1.151), we estimate undervaluation at 1.3%. This means another leg lower would either imply some significant premium build-up on the euro (which generally argues for faster reversals) or require some hawkish Fed repricing. We don’t see a catalyst for the second, and we expect instead some stabilisation in the pair in the coming days with upside risks to 1.160.
Elsewhere in Europe, Norway’s central bank announces policy today. It’s unlikely we’ll see another cut, as its latest policy projections imply a pause until mid-2026 and macro inputs haven’t changed materially. Underlying CPI eased slightly to 3.0% but the headline accelerated to 3.6% in September. Meanwhile, US rate expectations have been revised higher and NOK has come under some pressure of late, both hawkish signals. We don’t expect any tweaks in communication and a neutral impact on NOK, which should, however, recover some ground if equity markets stabilise.
In neighbouring Sweden, CPIF inflation for October came in a bit hotter than expected at 3.1%, with core also slightly above consensus at 2.8%. This broadly endorses the Riksbank’s unchanged message yesterday: the bar for another cut is high. The EUR/SEK reaction has been small as markets were pricing in little to no chance of more cuts ahead. Anyway, the data modestly reinforces our bearish EUR/SEK view. We are now targeting a return to 10.90 in the near term.
GBP: Bank of England to Hold, December Cut in Play
Markets are pricing in a 25% probability of a Bank of England cut today. As we discussed in our preview, our call is for a hold, as a single positive inflation print shouldn’t be enough to bring an MPC majority behind a cut.
But the vote split could be 6-3 or perhaps a more dovish 5-4, which would signal the bar isn’t high for a cut in December.
We think there are some upside risks for GBP today as markets may not receive clear signals towards a December move (16bp priced in), and also considering EUR/GBP is still trading around 1% above its short-term fair value. As back-end gilts have performed well, we read that risk premium as an anticipation of speculation via FX of a worse economic outlook for Britain (not a worse fiscal position), which is still to be reflected in short-term rates.
Anyway, the upside for GBP remains limited in the coming weeks as prospects of tax hikes and CPI data may ultimately consolidate dovish bets. Our year-end target remains 0.880 for EUR/GBP.
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