The US Dollar experienced modest losses, declining steadily ahead of the Federal Reserve’s anticipated 25-basis-point rate cut on Wednesday. Similarly, the Bank of Canada is expected to reduce its rate to 2.25% from the current 2.50%.

The US Dollar Index capped at the 99.00 region as US Treasury yields retraced before the FOMC meeting. Upcoming key events include the Fed’s interest rate decision, MBA Mortgage Approvals, Pending Home Sales, and the EIA’s crude oil inventory report.

Euro In Focus

EUR/USD rose for the fifth day, nearing its 100-day SMA at 1.1660-1.1670. The European calendar awaits the ECB’s rate decision and Germany’s flash CPI, Q3 GDP Growth, and labour market report on October 30.

GBP/USD shifted focus downwards, nearing recent lows around 1.3250, with the BoE’s Consumer Credit figures and other financial statistics pending. USD/JPY dropped to multi-day lows at 151.70, and Japan’s Consumer Confidence gauge is expected next.

AUD/USD traded near the 0.6600 resistance amid Australia’s Inflation Rate data. USD/CAD fell below a 200-day SMA due to a weaker US Dollar, with BoC’s rate cut expected.

WTI oil dropped below $60.00 per barrel, and Gold hit four-week lows near $3,870 per ounce. Silver prices recovered slightly from five-week lows.

Federal Reserve Decision Imminent

The expected 25-basis-point rate cut from the Federal Reserve today seems all but certain, especially after September’s Non-Farm Payrolls report showed a gain of only 95,000 jobs, missing expectations. With core inflation recently cooling to 2.8%, the Fed has the justification it needs to ease policy. This environment should prompt traders to prepare for heightened volatility in dollar-denominated derivatives.

We see this as a signal to position for further dollar weakness, as this cut is unlikely to be a one-off event. This environment is reminiscent of the Fed’s policy pivot back in 2019, which initiated a multi-month period of dollar softness. Traders could consider using options to play a potential break below the 98.50 support level in the Dollar Index (DXY) over the coming weeks.

The Bank of Canada is in a similar position, and we fully anticipate a quarter-point cut to 2.25% today. The recent dip in WTI crude below $60 a barrel, coupled with sluggish domestic Q3 GDP growth of just 0.5% annualized, pressures the Canadian economy. This makes shorting USD/CAD a popular trade, so traders should watch for a sharp reversal if the BoC’s forward guidance is less dovish than expected.

With the European Central Bank decision tomorrow, implied volatility on EUR/USD options will likely remain elevated as the pair challenges its 100-day moving average. For those watching commodity currencies, Australia’s upcoming inflation data is pivotal for AUD/USD’s attempt to break the 0.6600 resistance level. A weaker-than-expected inflation print would likely see that rally fail and present an opportunity to short the pair.

Despite the dollar weakness, gold’s recent drop to near $3,870 suggests some traders are taking profits after its massive run-up. We attribute its high valuation to the significant inflationary wave we navigated through 2024, which is now subsiding. A dovish Fed today could, however, put a floor under prices, making this dip a potential entry point for long-term bulls using futures contracts.

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