Currency markets at a crossroad again ahead of the FOMC

Despite another week of broadly dollar-positive news, the greenback has continued to drift sideways – suggesting its rally since July is running out of steam. Even though US Q3 GDP came in at nearly 5% annualised growth, while data in Europe continued to paint a bleak picture of the outlook and the ECB in effect confirmed that its rate hiking cycle is at an end, the dollar is roughly flat against the euro. Likewise, the fall in global equity markets this week and the ongoing uncertainty around the Hamas-Israel conflict has not done much to drive the dollar higher against risk-sensitive currencies. This reinforces our sense that a relatively optimistic assessment of the outlook in the US is by now largely discounted in the dollar. That means it would take a more substantial shift – either an even wider gap in the economic outlook in favour of the US, or a further deterioration in risk sentiment – to drive higher from here.