The Morning Update

The USD edges higher, oil prices weaken, equity markets are down, and US yields rise as global risk appetite wanes. The U.S. dollar held near a three-month high on Tuesday as traders scaled back expectations for further Federal Reserve rate cuts following mixed signals from policymakers. With the U.S. government shutdown halting key data releases, investors relied on private reports. Meanwhile, the Fed’s cautious tone and fading rate-cut bets lifted the dollar index above 99.80, its strongest level since early August. Global equity markets retreated as investor optimism faded amid renewed concerns over high valuations and mixed signals from U.S. Federal Reserve officials. Wall Street futures slid, with the S&P 500 and Nasdaq 100 both under pressure after AI giant Palantir’s earnings disappointed and bank executives warned that stocks may be due for a correction. European and Asian shares also declined, led by losses in technology sectors, while UK gilts outperformed as Finance Minister Rachel Reeves hinted at possible tax hikes to rein in fiscal deficits. Overall, risk sentiment softened as traders reassessed their positions ahead of the next Fed meeting and awaited more explicit guidance on the global economic outlook. Elsewhere, Oil prices weakened as global demand concerns resurfaced and supply pressures eased, while Bitcoin tumbled amid renewed risk aversion. Gold prices also softened, as waning safe-haven demand and subdued investor momentum following earlier gains took hold. Today's focus will be on Canada's Annual Budget release, as well as speeches from ECB President Lagarde, Fed's Bowman, BoE's Breeden, and ECB's Nagel, which are expected to help drive currency markets intraday.

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In the news. DOW futures drop 300 points as AI trade cools. US Fed's Cook signals a December rate cut is not a foregone conclusion. UK's Reeves paves the way for tax rises in her budget. China's Xi seeks to boost investment and expand economic ties with Russia. Starbucks to sell control of China business to Boyu, aims for rapid growth. Norway's wealth fund to vote 'no' on Musk's $1 trillion Tesla pay package. Carney to unveil debt-fuelled budget to revamp Canada's economy. OECD reports sharp fall in work-related migration to rich countries. Bob Diamond sees M&A taking out 3,000 US banks in the Trump era. Russian oil will find buyers despite sanctions, Gunvor CEO says.

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In currency markets. Falling energy and commodity prices have directly weakened the South African rand, the Australian dollar, and the Mexican peso, as reduced export revenues from metals, minerals, and energy have diminished investor demand for these currencies. The ZAR and AUD, being more resource-dependent, have experienced sharper declines, while the MXN has also come under pressure from lower prices of industrial metals. CNY and Asian currencies on average hold steady against the USD. Trading currencies come under renewed pressure, with NOK, ZAR & NZD weakening 0.75%. SEK, MXN, and AUD falling 0.6%, PLN, CZK & DKK down 0.2%. KWD & CHF flat, while the outlier gained 0.5% against the USD.

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In commodity markets. Oil prices weakened by 1.7%. Natural Gas prices fell 0.6%. Gold prices slipped 0.2%. Silver prices dropped 1.2%. Copper prices tumbled 2.8%. Coffee prices rallied 2%, while Soybean prices eased 0.6% and Wheat prices gained 0.6%.

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CAD continues under pressure, edging towards 1.4100, as it tests nearly one-month lows, driven by the widening yield spread between Canadian and U.S. two-year bonds, which has prompted investors to seek the higher-yielding greenback. Lower oil prices and a dovish Bank of Canada stance, following its rate cut to 2.25%, are further pressuring the loonie. Budget Expectations: Prime Minister Mark Carney’s upcoming budget is expected to introduce tens of billions in spending cuts and tax reforms aimed at stimulating investment and competitiveness. The government plans to rebalance operational spending within three years while increasing capital investments in defence, housing, and climate strategy. However, with the deficit projected to surge to between $70 billion and $100 billion, political risks remain high as the minority Liberal government seeks enough opposition support to pass the budget.

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EURCAD as the European Central Bank kept policy unchanged and maintained a cautious, data-driven tone under President Christine Lagarde. Traders remained hesitant to take new positions in EUR/CAD ahead of Canada’s upcoming federal budget, which could shift fiscal and growth expectations for the loonie.

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EUR slipped towards the 1.1500 level, hitting a fresh three-month low as risk sentiment favoured the greenback. European Central Bank President Christine Lagarde maintained that inflation in the eurozone remains “quite contained” and reiterated a data-dependent stance. Meanwhile, Federal Reserve Governor Lisa Cook noted that a December rate cut is not a foregone conclusion, emphasizing that policy decisions are not on a preset course and that the Fed must weigh the risks of acting too early or too late—remarks that added further support to the dollar and pressure on the euro.

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GBPEUR weakened as the pound came under pressure following comments from Rachel Reeves, where she signalled looming tax rises and spending cuts ahead of the UK’s budget, raising questions about the nation’s fiscal outlook. Meanwhile, the European Central Bank held its key interest rate unchanged at 2%, stating that the euro-zone economy remains in “a good place” and giving no firm signal on future policy.

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GBP weakened further, slipping towards 1.3050 as investors reacted to UK Chancellor Rachel Reeves’ warning that higher borrowing costs could persist amid slow progress in reducing inflation. Reeves’ comments, coupled with speculation over potential tax hikes in the upcoming Autumn Budget to address a £22 billion fiscal gap, weighed heavily on sentiment. With markets also reassessing expectations for U.S. rate cuts after Fed officials cautioned that a December move is not guaranteed, the pound continued to underperform against major peers.