As growth-oriented currencies struggle, upcoming economic data and central bank meetings are expected to limit further gains for the USD, according to UBS's insights on recent currency market movements.
This comment follows the US Dollar's (DXY index) rebound after failing to break the 100 level.
Analysts noted that the decline of the USD halted this week due to several factors, including escalating conflict in the Middle East, the impending US presidential elections, and weak economic indicators from Europe. These elements have provided support for the USD, suggesting that its recent weakness may have been exaggerated.
UBS anticipates that the market will closely monitor European economic data, such as retail sales, German manufacturing orders, and industrial production in the coming week. Special attention will be paid to the UK’s industrial production, trade, and employment figures, along with potential hints from the Bank of England regarding quicker interest rate cuts.
In the US, focus will shift to the labor market report due on Friday and September inflation data. UBS suggests that if other major economies serve as an indicator, the risk for US inflation data may be to the downside, which could strengthen expectations for a US rate cut and potentially exert pressure on the dollar.
Additionally, UBS commented on expected actions from other central banks. The Reserve Bank of New Zealand (RBNZ) is anticipated to cut its policy rate by 50 basis points due to recent business surveys indicating potential economic weakness. This move is already priced into the market, but the New Zealand Dollar (NZD) is expected to perform poorly due to anticipated continued weak domestic data. Consequently, UBS prefers the Australian Dollar (AUD) over the NZD.
Finally, UBS noted that while emerging market currencies have started October weakly, they had rallied since late July. The Mexican Peso stood out for its strength following market-friendly comments from newly elected President Claudia Sheinbaum. In contrast, the Israeli Shekel is under pressure amid escalating conflict in the Middle East, with the Bank of Israel expected to keep its policy rate steady at the upcoming meeting.