Fx Daily: Waiting For The Market’s Verdict On The Debate

The US Presidential debate may or may not be a turning point in the campaign, but the market's reaction to it could provide clues about how the dollar will fare in the run-up to the election.

USD: Risk recovers ahead of Presidential debate

Risk assets are starting to recover from last week’s flight-to-safety and equity futures point to another positive open for stocks in Europe and the US. While consumer confidence (we expect a relatively strong reading) and some Federal Reserve speakers (Williams, Harker, Clarida, Quarles) will be the highlights in trading hours, tonight’s Presidential debate (at 9pm ET/ 2am GMT) will take centre stage. Democrat rival Joe Biden heads into the face-off with an almost 5 point lead in the polls, with some surveys giving him a 10-point lead. While the debate may or may not be a turning point in the campaign, it will provide a first gauge of the market's reaction to any perceived advantage of one candidate over the other. We expect a Trump re-election to be a USD-positive, although the non-negligible risk of a contested outcome (along with the ultra-dovish Fed) may keep the the dollar’s upside somewhat capped in the run-up to the vote, even if Trump’s perceived chances rise. Away from the debate impact, the US dollar could face another unexciting day as risk assets continue to recover. (UUP)

EUR: First glance at inflation

Inflation numbers out of Germany today will shape expectations for Friday’s eurozone-wide data. Markets are likely expecting a flat year-on-year print at 0.0% in Germany, with any move into negative territory possibly adding fuel to recent speculation around a European Central Bank rate cut. Yesterday, President Christine Lagarde stressed that the Bank remains ready to add stimulus if needed to support the economic recovery and that it continues to monitor the exchange rate among other indicators to assess the medium-term inflation outlook. Barring a negative CPI reading in Germany, EUR/USD should test 1.1700 today ahead of the US Presidential debate as improved sentiment may take some support away from the USD. (FXE)

GBP: Downside risks still sizeable

Sterling continues to be a mirror of market complacency to the UK-EU trade negotiations and the risk of a legal fight between the two sides if the UK walks away from the Withdrawal Agreement. Developments on this front may have make-or-break implications for GBP, and Brexit-related news will be closely monitored. For now, we still see GBP’s balance of risks as skewed to the downside. (FXB)

SEK: Domestic drivers to have limited impact

The Swedish krona appears to be on a recovery path after last week’s losses, and today some domestic drivers may also play a role (although general market sentiment remains the primary driver). The Economic Tendency survey (0800 GMT) will provide information about the pace of the economic recovery, while a speech by Riksbank’s Governor Stefan Ingves (also at 0800 GMT) will be scanned for hints about a shift in policy – which we deem unlikely, however, at this stage. (FXS)