Dollar Mixed as Market Sentiment Shifts Across Regions

The dollar traded mixed on Tuesday, reflecting varied economic developments and regional positioning. The British pound gained support after a robust U.K. employment report, while falling oil prices and a weaker yuan weighed on commodity-linked currencies like the Canadian and Australian dollars. The U.S. Treasury yield curve flattened as the New York Fed’s factory activity index dropped sharply to -11.9 in October from a positive reading the previous month, signaling softening economic momentum.

Fed Signals Room for Rate Cuts Amid Weaker Growth

Comments from San Francisco Fed President Mary Daly reinforced the potential for future rate cuts, as the Federal Reserve continues to reduce its balance sheet. Market participants now anticipate slower economic growth and a gradual shift in Fed policy. Meanwhile, political developments added complexity, with Donald Trump, a Republican presidential candidate, defending protectionist trade policies and proposing high tariffs on vehicles imported from Mexico.

Bearish Sentiment on Euro and Commodity-Linked Currencies

The euro remained under pressure ahead of the European Central Bank’s upcoming policy meeting, with markets expecting a rate cut. In Canada, inflation eased more than expected to 1.6% in September, amplifying expectations for a 50-basis point rate cut next week. Additionally, the IMF revised its growth forecast for Mexico, predicting a slowdown to 1.5% this year, further weighing on sentiment toward commodity-linked currencies.

Oil Prices Plunge as Supply Concerns Ease

Oil prices dropped 4%, reflecting diminished fears of supply disruptions from Iran and a weakening demand outlook. The sharp decline in crude prices contributed to further pressure on commodity markets, adding to uncertainty surrounding China’s unclear stimulus plans. Copper fell 1.5% to a three-week low, reflecting concerns over slowing global growth. Gold, however, gained 0.49% as falling Treasury yields supported safe-haven demand.

Equities Weaken as Tech and Oil Sectors Struggle

The equity market showed signs of weakness, with the S&P 500 declining 0.66%, led by losses in the tech and energy sectors. Weak macroeconomic data and declining oil prices dampened investor sentiment, further contributing to the cautious market outlook.

Currency Markets Respond to Economic Data and Policy Shifts

Currency markets reflected shifting economic data and central bank expectations. EUR/USD fell 0.18% as traders positioned for a likely ECB rate cut on Thursday. USD/JPY slipped 0.33%, driven by weaker U.S. economic data and the dollar’s mixed performance against haven currencies like the yen. GBP/USD edged up 0.05%, supported by the positive U.K. jobs report, though gains were limited by overall dollar strength.

Commodity-linked currencies struggled, with AUD/USD falling 0.33% due to weak commodity prices and uncertainty surrounding China’s policy measures. EUR/JPY dropped 0.47%, reflecting a broad weakening of the euro, while GBP/JPY edged higher by 0.12%, buoyed by the pound’s resilience. AUD/JPY posted the sharpest decline, down 0.65%, as deteriorating risk sentiment weighed on the Australian dollar.

Outlook: Central Bank Decisions and Economic Data to Drive Sentiment

Looking ahead, currency markets are expected to remain volatile as traders focus on upcoming central bank decisions and economic developments. The dollar may face downward pressure if soft U.S. data reinforces expectations of Fed rate cuts. However, political uncertainties surrounding the U.S. election and trade policy could complicate the outlook.

The euro is likely to remain weak, with markets anticipating an ECB rate cut and the post-decision press conference providing further direction. The British pound may gain additional support if U.K. inflation data exceeds expectations, though broader market sentiment will remain crucial for sustaining momentum. The Canadian dollar will remain vulnerable amid expectations of rate cuts and weak oil prices, while the Australian dollar’s outlook depends on clarity regarding Chinese stimulus efforts. With geopolitical risks and central bank communications driving sentiment, heightened volatility is likely to persist across asset classes in the near term.