The US Dollar (USD) is mixed to slightly firmer as markets grapple with a range of issues driving market sentiment, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Trump/Xi talks end positively

"The brief Trump/XI meeting earlier today concluded with a year-long truce which will see, among other concessions, the US roll back some tariffs and China suspend curbs on rare earth exports. A seemingly positive conclusion to the talks has not spilled over into equities, however, where sentiment has been dulled by yesterday’s cautious Fed rate cut and mixed tech sector earnings. The EUR is a moderate outperformer ahead of the ECB policy decision, following the release of stronger than expected Eurozone growth data. The JPY is a clear underperformer, meanwhile, following the (as expected) hold at today’s BoJ policy decision."

"Yesterday’s Fed outcome was largely as expected—a 25bps cut in the target rate and the teeing up of an end the Fed’s balance sheet shrinkage (in December). There was also dissent—Governor Miran favouring a 50bps cut while KC Fed President Schmid preferred no cut at all. The split highlights the tension in the Fed’s mandate and an unusually divided FOMC. Chair Powell’s press conference noted 'strongly differing' views on the near-term policy outlook and the chair was unusually strident in pushing back against expectations of more easing in December. He said another cut was not a 'foregone conclusion', adding 'far from it' a couple of times when talking about the policy outlook."

"This was an exercise in expectations management to allow the Fed some room for maneuver if, for example, the government shutdown persists and the Fed remains deprived of economic data reports. Lower rates remain very likely, even if the timing is a little less certain. Swaps reflect the more cautious outlook, with the odds of a December cut falling to around 70%, from well above 90% prior to yesterday’s meeting. Slightly firmer yields are helping underpin the USD but, with cuts still on the horizon (markets still anticipate more than 100bps of Fed easing over the next 12 months), scope for gains may remain limited."