EUROPEAN SESSION
In the European session, the main highlight will be the UK Budget announcement at 12:30 GMT/08:30 ET. The UK Chancellor is expected to announce targeted tax increases and cost-of-living support, with markets focused on the OBR’s updated forecasts and the government’s fiscal headroom, estimated at around £15–16bn.
A credible Budget with adequate fiscal headroomcould support GBP and gilts, pushing yields lower as fiscal risks ease. Conversely, weaker-than-expected headroom or higher borrowing could weigh on sterling and push gilt yields higher. The main focus should be on fiscal headroom, borrowing projections and the implications for inflation and monetary policy.
AMERICAN SESSION
In the American session, we have the Bank of Canada and the Federal Reserve announcing their monetary policy decisions.
Bank of Canada
The BoC is expected to hike interest rates by 25 bps, bringing the policy rate to 2.50% after Governor Macklem's hawkish comments recently reinforced expectations for pre-emptive tightening.
If we look at the economic data, though, the rate hike seems to be rushed and unnecessary since the Trimmed-Mean CPI, the BoC's preferred measure of underlying inflation, recently fell to 1.8% y/y, below the mid-point target of 2%. The employment data has been soft and the unemployment rate recently ticked higher, so a softer labour market should also call for caution. Moreover, the US-Canada trade war is also weighing on the Canadian economy.
A hike accompanied by hawkish guidance could support the CAD further, while a hike followed by cautious forward guidance could trigger a dovish repricing, weighing on the Canadian dollar. A surprise hold, on the other hand, will likely trigger a strong selloff in the CAD which could quickly erase last week's gains.
Federal Reserve
The Federal Reserve is widely expected to keep interest rates unchanged at 3.75–4.00%. With limited changes expected to the policy statement, the focus will be on Fed Chair Warsh’s press conference. Despite higher September inflation data strengthening the case for further tightening, key Fed members have signalled little urgency to deliver a back-to-back rate hike in October. A hawkish hold remains the base case as the debate centres around the timing and extent of further tightening rather than direction.
Warsh is expected to reiterate that monetary policy is not sufficiently restrictive and that additional tightening is warranted. He's also seen reaffirming the commitment to price stability but cautioning against overreacting to individual data points. Markets are already pricing an 80% chance of a rate hike in December, so the focus will be more on the 2027 outlook. Traders see roughly two more rate hikes next year, with the first fully priced move in April.
A surprise rate hike would trigger strong risk-off flows, particularly in equities and crypto markets. The US dollar and Treasury yields might initially react positively to the decision, but I think the reaction will be quickly faded as growth concerns should intensify amid falling stock markets. A largely neutral outcome that avoids signalling an imminent rate hike could be taken as dovish and trigger a relief rally in risk assets. I would also expect the same reaction but with less magnitude in case the Fed just delivers on the hawkish hold expectations, avoiding major surprises. With no new projections or dot plot expected at this meeting, changes in Warsh's or statement's language will be the main focus.
This article was written by Giuseppe Dellamotta at investinglive.com.
Source: Investing Live - News
