USD likely to remain well-bid – Election now main source of uncertainty for markets

The September payrolls report in the US came out much stronger than expected, as job creation, unemployment and wage increases all came out significantly better than expected.

The Federal Reserve appears to have engineered a proper soft landing, which should increase the chances of a more gradual pace of FOMC policy loosening - chair Powell nodded to as much during his remarks last week. Indeed, markets now see less than a 10% chance of a 50bp cut from the Fed next month, with a ‘standard’ 25bp cut now the market’s clear baseline scenario.

While risk assets will welcome lower US rates, the strength of the US economy, a more hawkish than expected Fed, and growing geopolitical fears about the Middle East escalation could keep the USD well bid.

The main source of uncertainty now is the presidential election. This remains too close to call, with betting odds pointing to an effective dead heat following last week’s VP debate.