Foreign Exchange Commentary

Summary

• FOMC cuts rates 25 bp to 4.25% with only one dissent coming from Stephen Miran for a 50 bp cut
• The Fed cut rates by 25 bps to 3.75–4.00% as expected but delivered a hawkish tone
• The FOMC split 10–2, showing divisions: one member wanted a 50-bps cut, another wanted no cut
• The Fed announced end of quantitative tightening on Dec 1, after shrinking balance sheet by $2.2 trillion
•  EURUSD fell ~1.0%, to 1.1556, after Fed and ECB decisions
• GBPUSD dropped approximately 1.7% to 1.3132, lowest since April due to fiscal concerns
• USDCAD fell 0.14% to 1.3986 as BoC signaled end of cutting cycle
•  USDMXN range-bound 18.30–18.60, supported by rate differentials
• BoJ held at 0.5%, but 2 hawkish dissents wanted a hike to 0.75%

Currency Markets React to Fed Hawkish Tone
The Federal Reserve cut its policy rate by 25 basis points to 3.75-4.00% as unanimously expected by markets, but the decision itself revealed divisions within the FOMC. Two officials dissented in opposite directions, Governor Stephen Miran wanted a 50bps cut citing labor market concerns, while Kansas City Fed President Jeffrey Schmid voted to hold rates unchanged given persistent inflation at 2.8%, well above the 2% target.

Chair Jerome Powell's warning that December's decision is "far from a foregone conclusion" sent prompted reactions in currency markets. The British pound dropped to six-month lows, the yen surge to eight-month weakness, and the euro test critical support levels, while the Canadian dollar defied dollar strength with a surprise hawkish pivot from its own central bank.

Powell's statement about "strongly differing views" among officials marked a dramatic shift from the near-certain easing path markets had priced in, dropping December cut probabilities from 90% to 67%.

This hawkish tone came despite growing evidence supporting the idea that the US economy may be starting to slow down - job gains slowing, unemployment edging higher to 4.3%. Yet Powell emphasized upside inflation risks from tariffs pushing prices up, creating a challenging policy environment where "risks to inflation are tilted to the upside and risks to employment to the downside."

The Fed also announced it will end quantitative tightening on December 1 after shrinking its balance sheet by $2.2 trillion. The combination of continued cuts but slower pace ahead produced the dollar strength that impacted most major currencies.

Euro drops on Divergent Montetary Policies in the U.S. and EU
The euro declined approximately 1.0% during the week, falling from highs near 1.1669 on Monday to lows around 1.1556 by week's end. The euro hit its weekly low of 1.15565 on Thursday following back-to-back central bank meetings that highlighted the policy divergence despite both central banks holding relatively hawkish stances.

The European Central Bank held all three key rates unchanged on October 30 for the third consecutive meeting—the deposit facility rate remained at 2.00%, main refinancing at 2.15%, and marginal lending at 2.40%. President Christine Lagarde characterized monetary policy as being in a "good place," noting inflation remains close to the 2% medium-term target while the economy has continued to grow despite challenging global conditions.

Eurozone economic data provided mixed support for the euro. Third-quarter GDP grew 0.2% quarter-on-quarter, exceeding expectations of 0.1% and demonstrating resilience despite headwinds from manufacturing weakness. France and Spain delivered strong performances that offset Germany's slowdown, with services sectors bolstered by tourism and digital services even as manufacturing remained soft due to higher tariffs and a stronger euro. September inflation came in at 2.1% YoY, down slightly from 2.2% in August, with core inflation at 2.4%.

Sterling drops on U.K. Budget Concerns
The British pound dropped 1.7% from Monday's high of 1.3367 to a six-month low of 1.3138 on Wednesday. The British pound closed the week around 1.3120 (as of the time of this writing), dropping 5% below YTD highs. The pound's weakness reflects a combination of domestic fiscal concerns and hawkish Fed policy which created downward pressure for sterling.

Pre-budget uncertainty dominated the week. The Office for Budget Responsibility's expected to widen the UK's projected fiscal gap by over £20 billion, forcing the government to announce a combination of tax increases and spending cuts that markets view as contractionary for the British economy. The simultaneous weakness in both UK government bonds (Gilts) and the Pound-sterling are presenting bearish signals, suggesting concerns about both fiscal sustainability and economic growth.

Bank of Canada signals Hawkish pause
The Canadian dollar resisted the trend of broad dollar strength. The pair opened near 1.40 (six-month highs) but dropped immediately after the Bank of Canada's October 29 decision as markets interpreted the BoC's forward guidance as surprisingly hawkish - despite delivering an expected rate cut. USDCAD has since reversed these losses and is trading back at 1.4000 levels at the time of this publishing.

The Bank of Canada cut its policy rate by 25 basis points to 2.25%, bringing rates to the lower end of the BoC's neutral range of 2.25-3.25%. The critical language that surprised markets stated: "If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment." This "about right" comment strongly suggests the BoC may be at or near the end of its cutting cycle.

Governor Tiff Macklem's commentary emphasized the structural nature of Canada's economic challenges. US tariffs and trade uncertainty have not just created cyclical weakness but caused "structural damage" that reduces productive capacity and limits monetary policy effectiveness. The BoC cut its 2025 GDP growth forecast to 1.2% from 1.8% in January, and 2026 growth to 1.1% from 1.8%, citing trade conflict costs for businesses and upward inflation pressure from tariffs. The economy contracted 0.4% in Q2 2025, the largest quarterly contraction in nine years outside the Covid-19 period, driven by a sharp drop in exports to the US.

Mexican peso continues to show strength
The Mexican peso weakened modestly against the dollar, with USDMXN rising 0.72% from 18.3971 to 18.53 through Thursday's close. The pair touched a weekly high of 18.60 on Wednesday following Powell's hawkish tone, but the peso continues to demonstrate relative strength compared to other currencies, supported in large part by attractive carry trade dynamics and improving inflation data.

Mexico's inflation data released October 23 provided the week's most positive development for the peso. The headline CPI slowed to 3.76% YTD, below expectations. This marked continued progress in the disinflationary trend, giving Banxico additional room for monetary policy easing while maintaining its substantial interest rate advantage over developed markets.

The Bank of Mexico is widely expected to deliver another 25-bps cut at its early November meeting, bringing the policy rate to 7.25% from the current 7.50%. Despite this anticipated easing, Mexico maintains a massive 350-375 basis point interest rate differential versus the US, making peso-denominated assets highly attractive for carry trades.

Japanese yen at eight-month lows
The Japanese yen suffered dramatic weakness, with USDJPY surging to 154.45 on Thursday, an eight-month high not seen since February 13, 2025. The yen has weakened 4.76% over the past month, reversing earlier 2025 gains and raising urgent concerns about currency stability that prompted Finance Minister Satsuki Katayama to issue verbal intervention warnings on Friday.

The Bank of Japan held its policy rate unchanged at 0.5% on October 30 as widely expected, but the decision revealed significant internal disagreement. The 7-2 vote included two dissenting officials who proposed hiking rates to 0.75%.