US Dollar (USD) is holding on to most of yesterday’s gains. Global stocks are selling off with futures pointing to further losses for US equity markets. An upward adjustment to US interest rate expectations fueled by cautious comments by a handful of Fed officials is underpinning USD and undermining risk assets. Yesterday, Fed Vice Chair Philip Jefferson argued to proceed slowly with rates cuts 'as we approach the neutral rate', BBH FX analysts report.

Diverging Fed views pressure Dollar outlook

"Still, caution on easing isn’t shared by all Fed officials. Fed Governor Christopher Waller (one of the five finalists for the next Fed chair) made the case yesterday for continuing rate cuts. Waller warned the US labor market is still weak and near stall speed and he’s not worried about inflation accelerating or inflation expectations rising significantly. Waller points out that downward pressure on wages, declines in vacancies and quit rates suggest low job-creation numbers are the result of declining labor demand rather than declining labor supply. As such, he supports cutting the funds rate by another 25bps at the next December 10 meeting (45%priced-in)."

"We agree with Waller’s labor market view and policy implication. Bottom line: USD is bound to come under renewed downside pressure. Today’s ADP weekly employment preliminary estimate will offer the most current view of the US labor market (1:15pm London, 8:15am New York). Last week’s report showed that for the four weeks ending October 25 private employers shed an average of -11,250 jobs a week, indicative of weak labor demand."

"Meanwhile, US continuing jobless claims increased in the week through October 18. Although continuing jobless claims are still low by historical standards, they are running above levels in 2023 and 2024, reflecting a lengthening in job-finding times. The other data due today are: August factory orders and the September TIC flows. Fed speakers include: Fed Governor Michael Barr and Richmond Fed President Tom Barkin (non-voter)."