USD/CAD climbs towards 2-week high

Key Movers

The US dollar index (DXY) experienced some downward pressure, retreating to the 106.30 range. This dip was driven by a waning momentum in US yields across various maturity periods. Additionally, investor sentiment remains cautious in anticipation of Federal Reserve Chair Jerome Powell's speech and ongoing geopolitical tensions. If Powell indicates that the increasing bond yields may lead to the Fed abstaining from another interest rate hike this year, the US dollar may face substantial selling pressure, prompting a continued and even more notable decline in bond yields. Such a dovish stance is expected to bolster risk-oriented equity markets. Alternatively, Powell might emphasize the necessity of another interest rate increase. In this scenario, it is likely that he would cite concerns over inflation progress and the robustness of the US economy. If this is the narrative, the USD could remain strong against other major currencies. A third possibility is that the Fed Chairman opts for a neutral tone by noting that the Fed will wait for more data before making any decisions on policy tightening by year-end. While this initial response could heighten USD volatility, a definitive market direction may remain elusive as investors may prefer to wait for the October jobs report data to establish their positions.

The euro made gains against the USD, propelling the EUR/USD pair to daily highs around 1.0580 in the European afternoon on Thursday. Turning to monetary policy, current market expectations lean towards the Fed maintaining its current interest rate for the remainder of the year as European markets similarly contemplate the possibility of the European Central Bank (ECB) also concluding its cycle of interest rate hikes. This sentiment comes despite inflation levels surpassing the bank's target and growing concerns regarding the potential for an economic slowdown.

The GBP rebounded around the significant support level at 1.2100. While the pound has found some support, the overall outlook remains fragile, primarily due to ongoing concerns about inflation. The GBP/USD pair struggles to gain momentum, with the UK Consumer Price Index (CPI) report for September, released on Wednesday, indicating that inflation remains stubborn, driven by elevated oil prices, rising service costs, and robust wage growth.