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EUR/AUD's pullback was a little deeper than expected last week, but it nonetheless recovered after hitting 1.7798. Initial bias remains neutral first. On the upside, break of 1.7965 minor resistance will bring retest of 1.8160. Firm break there will solidify the case that larger up trend is resuming. However, below 1.7798 will dampen this week and suggest that corrective pattern from 1.8554 is still extending. In this case, deeper fall should be seen to 1.7569 support instead.

In the bigger picture, price actions from 1.8554 medium term top are seen as a corrective pattern, which might have completed already. Firm break of 1.8554 will resume larger up trend from 1.4281 (2022 low), and target 61.8% projection of 1.5963 to 1.8554 from 1.7569 at 1.9170. Nevertheless, break of 1.7569 support will delay the bullish case and extend the correction from 1.8554.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6506) holds, this second leg could still extend higher.

EUR/CHF edged lower last week but recovered ahead of 0.9204 support. Initial bias remains neutral this week first, and some more consolidations could be seen. But upside should be limited below 0.9311 support turned resistance. On the downside, break of 0.9204 will confirm larger down trend resumption. Next target is 61.8% projection of 0.9660 to 0.9218 from 0.9452 at 0.9179. Firm break there will target 100% projection at 0.9010.

In the bigger picture, outlook remains bearish with EUR/CHF staying well inside long term falling channel after multiple rejection by 55 W EMA (now at 0.9395). Firm break of 0.9204 will resume the whole down trend from 1.2004 (2018 high). Next target is 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. Break of 0.9452 resistance is needed to be the first sign of medium term bottoming.

In the long term picture, overall long term down trend is still in progress in EUR/CHF. Outlook will continue to stay bearish as long as 55 M EMA (now at 0.9820) holds.

• Fed to highlight busy week for central bank decisions
• BoC expected to cut too, ECB and BoJ to likely stand pat
• Eurozone GDP and Australian CPI to also be important
• US government shutdown to delay more crucial US data

BoC to cut again despite CPI spike

Kickstarting the central bank bonanza is the Bank of Canada on Wednesday. After a six-month pause, the BoC resumed its rate-cutting cycle in September and is expected to ease again in October. Governor Tiff Macklem recently indicated that policymakers will be putting more emphasis on risks at the next decision.

Moreover, with relations between Canada and the US souring again after President Trump abruptly terminated trade talks over an anti-tariff TV ad, a deal has become elusive again.

Subsequently, an October cut seems like a done deal, although for the rest of the year and for 2026, investors have scaled back their bets following the stronger-than-expected acceleration in Canadian CPI in September.

Still, dollar/loonie’s shallow uptrend since April is safe for now and it may be some time before the BoC rules out further rate reductions.

Fed meets amid ongoing shutdown

The US government is no closer to ending the shutdown that has gripped the country since October 1 and is about to enter its fourth week. Democrats are still refusing to agree to the Republican party’s stopgap funding bill as they’re seeking guarantees from the Republicans that a vote will be held on extending the health care subsidies that are due to expire at the end of the year.

However, Donald Trump is holding firm in insisting that there will be no negotiations with the Democrats whilst the government is in shutdown. This intransigent stance of both sides increases the probability of a more material impact on the economy from a prolonged shutdown – something the Fed will likely be mindful about.

If by Wednesday, when the Fed concludes its two-day monetary policy gathering, it doesn’t look like Republican and Democratic Senators are closer to clinching a deal on a funding bill, downside risks to the economy will probably be more prominent in policymakers’ minds.

Will the Fed turn more dovish?

Back in September, FOMC members had pencilled in two more rate cuts for 2025 and one for 2026. Judging by the most recent commentary from officials, including from Chair Powell, it doesn’t seem that their views have altered much. Whilst the Fed is clearly worried about the labour market and is watching it carefully, it sees the rate cuts as more of an insurance against any unexpected spikes in unemployment rather than a necessary policy step.

On the other hand, the Fed remains vigilant about sticky price pressures and has signalled it won’t tolerate above-target inflation indefinitely. The caution about the pace of reductions in 2026 and 2027 stems from the uncertainty about what the full impact of Trump’s tariffs will be on domestic prices. Until the Fed has a clearer picture on both inflation and the jobs market, it’s unlikely that Powell will significantly change his language on the future policy path as he announces a 25-basis-points reduction.

Hence, Powell & Co. may strike a somewhat more dovish tone on Wednesday given the latest flare-up in US and China trade relations and the ongoing shutdown, but probably not by much. Even dovish members like Waller are reluctant to pre-commit to a series of rate cuts. This then raises the risk of some disappointment among traders if the Fed casts doubt on the market rate path that implies an additional 100-basis-points of cuts after October.

Some US data still in the pipeline

With the government shutdown continuing, more economic releases look set to be put on the backburner next week, including Monday’s durable goods orders, Thursday’s advance GDP estimate for the third quarter and Friday’s personal income and outlays report that contains consumer spending numbers and the core PCE price index.

However, investors and policymakers will have access to some data, mainly the business surveys, such as Tuesday’s consumer confidence index and the Chicago PMI on Friday.

Should the incoming surveys raise any concerns about the economy, it would give investors more reason to question the Fed’s cautious stance. Alternatively, a combination of solid indicators and a not-so-dovish Fed meeting could give the US dollar a notable leg up.

Takaichi win creates a dilemma for the BoJ

The Bank of Japan will announce its latest policy decision on Thursday less than a day after the Fed. Recent remarks from BoJ policymakers have been somewhat on the hawkish side, suggesting that a rate hike is firmly on the table for the October meeting. However, the odds of a 25-bps increase have fallen following newly elected LDP leader Sanae Takaichi’s confirmation as prime minister.

Far from toning down her Abenomics-inspired policies on massive government spending and accommodative monetary policy, Takaichi has doubled-down on the need for a fresh fiscal package to help households struggling from higher prices and for the Bank of Japan to align itself with the government’s economic policies.

This puts the BoJ in a tight spot when it comes to how soon it should raise interest rates again. Although inflation has been declining over the past few months, it remains well above the Bank’s 2% target. The Bank has also been sounding more upbeat lately about Japan’s economic outlook, as trade tensions ease with the United States, and is anticipated to revise up its growth forecasts.

The question now is how strong is the urgency to raise rates sooner rather than later? Takaichi’s appointment as PM has likely removed the immediate need for action, with investors pricing in only a 20% probability of a hike in October.

If the BoJ keeps rates unchanged as expected and simply hints that it’s moving closer to a hike without providing any explicit signals, there won’t be much of a reaction in the yen and traders will turn their attention to the Tokyo CPI figures out on Friday.

ECB meeting could be a non-event

The European Central Bank also meets on Thursday to set policy but it’s unlikely that there will be any fireworks. The Bank has been on pause since July and there seems to be a strong consensus within the Governing Council to hold rates at 2.0% for the foreseeable future.

With inflation hovering around the ECB’s 2% target and the Eurozone economy proving surprisingly resilient in the face of steep US tariffs, policymakers would prefer to preserve some firepower for a rainier day, even as some officials acknowledge that the next move is more likely to be down than up.

For the euro, however, this can only be good news for the bulls, especially as the Fed only recently resumed its easing cycle. The preliminary CPI estimates for October due Friday are also not expected to generate any significant moves even though they will be watched closely, and the bigger risk for the euro will be the flash Q3 GDP readings on Thursday.

The Eurozone economy is projected to have expanded by just 0.1% q/q in the three months to September. A weaker number could revive expectations of a further rate cut by the ECB, weighing on the euro.

Aussie eyes CPI data ahead of RBA decision

The Reserve Bank of Australia’s next policy meeting is in a little over a week’s time so the timing of Wednesday’s CPI report couldn’t be more ideal.

The report will include data for both the third quarter and September, potentially swaying the November vote as a 25-bps rate cut is less than 70% priced in. The recent economic figures out of Australia haven’t been going the RBA’s way as the unemployment rate jumped to 4.5% in September, while monthly inflation has edged up towards the upper target band of 3.0%.

However, in the quarterly readings, underlying measures of CPI have been declining and if this trend continued in Q3, the RBA is almost certain to trim the cash rate in November. That’s not to say, though, that there aren’t some upside risks for the Australian dollar should any of the CPI prints come in above forecasts.

Week in review

A rollercoaster week draws to a close for Global Markets. US-China trade talks were driving volatility and the mixed messages from both parties kept things interesting. Markets also saw harsher sanctions on Russian which has renewed the geopolitical risk premium when factoring in the Russia/Ukraine situation.

President Trump went back and forth this week, keeping markets guessing as his rhetoric went from diplomatic to combative and back to diplomatic by the end of the week regarding China. A date has now officially been set for a Trump-Xi meeting which at this stage is set for October 30.

President Trump is heading on an Asia visit this weekend with a senior US official stating that President Trump will sign economic agreements, including trade and critical minerals, on his trip this weekend.

The news of a Trump-Xi meeting which markets had expected since the start of the week led to a rise in equities globally. European stocks closed at record highs.

The S&P 500 and the Nasdaq are set to have their best week in terms of percentage gain since August. Meanwhile, the Dow Jones Industrial Average is heading for its biggest weekly jump since June.

The moves in Global stocks were also helped by the cooler than expected US CPI data.as well as US earnings.

The current third-quarter earnings season is moving very fast, with 143 companies in the S&P 500 having already reported their results.

So far, 87% of those companies have surpassed Wall Street's expectations.

Because of these strong results, analysts have raised their overall forecast for S&P 500 earnings growth for the quarter to 10.4% year-over-year, which is a solid improvement from the 8.8% growth that was expected at the beginning of October.

How has the US Dollar and FX Performed?

The US Dollar was nearly flat on Friday, steadying after a brief dip following the release of the inflation report, though it remained on track for a small gain for the week.

The euro rose slightly after a survey showed that business activity in the Eurozone, led by the services sector, grew faster than expected in October.

The Canadian dollar was slightly weaker but saw a minimal reaction overall.

Meanwhile, the Japanese yen fell to a two-week low despite data released earlier on Friday showing that Japan's core consumer prices remained above the central bank's 2% target, which kept alive expectations for an interest rate hike soon.

Taking a brief look at how commodities ended the week and Gold prices reduced their losses on Friday after a slightly cooler-than-expected US inflation report reinforced expectations that the Federal Reserve will cut interest rates next week.

Despite this recovery, gold was still set for its first weekly loss in ten weeks.

Meanwhile, oil prices fell slightly as investors grew skeptical about how strongly the Trump administration would enforce its new sanctions on Russia's two largest oil companies.

Even though both oil benchmarks retreated near the end of trading, giving up some of the previous day's large gains, they still finished the week more than 7% higher, marking their biggest weekly jump since mid-June.

The Week Ahead

Given that next week brings a host of central bank decisions, FX markets could have a busy week.

Beyond the data, markets will be focused on the Trump-Xi meeting, Russia-Ukraine developments as well as renewed tensions between the US and both Venezuela and Colombia. Any signs of US military intervention in Venezuela could add to the risk premium and affect overall market sentiment.

US earnings will also be key with a host of ‘magnificent 7’ companies all reporting Q3 earnings.

Let us take a look at some of the key data releases which could shake markets next week.

Asia Pacific Markets

In the coming week, all attention will be on the US-China trade talks.

The talks begin this weekend in Malaysia with top officials (led by China’s He Lifeng and US Treasury Secretary Scott Bessent) and are expected to lead to the long-awaited face-to-face meeting between President Xi Jinping and President Trump on October 30th in South Korea. This will be their first meeting since 2019, following months of increasing trade fights and threats.

Because the recent language has cooled, and President Trump has spoken optimistically about reaching a "fantastic deal" and even visiting China in 2026, we expect a positive outcome. This deal will likely at least continue the current uneasy trade truce.

However, Trump has kept his options open by suggesting the meeting might not happen. If the meeting does go ahead, it likely means the top officials (He and Bessent) have already agreed on the basic terms of a deal.

Regarding economic news, next week is quieter. The main data release will be China's manufacturing report next Friday, which is expected to show that manufacturing activity is still shrinking.

The Bank of Japan (BoJ) is expected to keep its interest rate at 0.5% on October 30th.

Even though the BoJ's board members still disagree on policy, the majority is not ready to change course yet. I believe that inflation has been firmly rising and the economy is holding up well despite challenges like US trade tariffs. These factors should support the BoJ's policy of eventually raising interest rates.

However, because most board members are cautious about raising rates too soon, a rate increase might be delayed until December. Supporting this view, I expect key data next week, like the Tokyo consumer price index, to show a strong rise of 2.5%, and for economic activity (like factory output and retail sales) to recover.

Central Bank Decisions and US-China Talks in Focus

The Federal Reserve is widely expected to cut its interest rate by another 0.25% on October 29th, following a similar cut last month. While the US economy looks decent and inflation is still a bit high, the Fed is shifting its focus because the risks are changing.

Price increases due to tariffs haven't been as severe as feared, giving time for factors like lower energy prices, slowing wage growth, and easing housing rents to help bring inflation down. At the same time, the job market is starting to look more concerning, with many indicators suggesting an increasing risk of job losses. Because this trend points to both weaker economic growth and lower inflation in the future, the Fed feels that moving interest rates closer to a neutral level is the sensible thing to do.

The report on third-quarter economic growth (3Q GDP) is unlikely to be released next week because of the ongoing government shutdown.

The upcoming European Central Bank (ECB) meeting should be uneventful. Since the last meeting, economic data for the Euro area has been mixed: some surveys improved, but August's official data disappointed. While September inflation briefly went above 2%, the new, important figures such as the third-quarter GDP growth and the October inflation rate will both be released on the day of the meeting itself.

With political risks calming down and officials signaling no rush, the ECB is expected to reaffirm its current stable position, with any potential decision on an interest rate cut pushed to December.

My opinion is that the October inflation rate will remain around 2%, and third-quarter economic growth will be a muted 0.1%, showing the economy is avoiding a recession despite global problems but is nowhere near a strong rebound.

Essentially, these data releases are expected only to confirm that the Eurozone economy is holding steady at a slow pace, so the ECB is unlikely to react to them strongly.

The Bank of Canada is expected to cut interest rates by 0.25% this week, even though recent reports showed job growth and inflation were a bit stronger than expected.

The central bank is under pressure to help Canada's economy, which has been severely damaged by US tariffs (since three-quarters of Canada's exports go to the US).

Additionally, Canadian consumers have very high debt levels, so the Bank is likely stepping in to provide needed support.

For all market-moving economic releases and events, see the MarketPulse Economic Calendar. (click to enlarge)

Chart of the Week - US Dollar Index

US Dollar Index (DXY) Daily Chart - October 24, 2025

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

• 97.70
• 96.90
• 96.37

Resistance

• 99.57
• 100.00
• 100.61

Canadian Highlights

• Headline inflation came in stronger than expected, but core measures remained stable, supporting the case for another interest rate cut next week.
• Long-term inflation expectations edged higher, but firms’ pricing power remained limited. Retail sales rose in August but declined in September, losing momentum on a three-month basis.
• Attention increasingly shifts to Carney’s forthcoming budget for signs of a broader growth strategy.

U.S. Highlights

• The federal government shutdown entered its 4th week, becoming the 2nd longest in history.
• The CPI data release for September, delayed by the shutdown, showed inflation moderated during the month but remained elevated on aggregate.
• Trade negotiations with China will ramp up over the next week in advance of the November 1st deadline for 100% additional tariffs threatened by the President.

Canada – Final Puzzle Pieces Before the Bank’s Rate Decision

This week’s Business Outlook Survey, CPI inflation and retail sales reports offered the final puzzle pieces before the Bank of Canada’s interest rate decision on October 29th. The TSX briefly wavered after the CPI release on tempered expectations for rate cuts, but quickly recovered, finishing the week 0.9% higher (as of writing). They also seem to have brushed off President Trump ending trade talks with Canada over an Ontario ad quoting President Reagan. Taken together, the data supports expectations for another Bank of Canada cut next week, while attention increasingly shifts to fiscal policy and Carney’s forthcoming budget for signs of a broader growth strategy.

The week began with the release of the Bank’s Q3 surveys on business and consumer sentiment. Both measures improved modestly but remain subdued, with roughly one-third of firms and two-thirds of consumers still expecting a recession. From a policy perspective, the most important signal was that firms reported limited pricing power amid weak demand. That should offset the slight rise in longer-term inflation expectations among consumers, especially given that the survey was conducted before the federal government announced its plan to remove counter-tariffs.

More difficult to ignore is the September inflation report, which showed headline CPI rising 2.4% year-on-year, above expectations for 2.2%. The acceleration was due to base effects, slower declines in gasoline prices, higher food prices, and a pickup in travel services prices. Still, inflation remains within the Bank’s 1-3% target range, while three-month trends in most core measures moved sideways (Chart 1). The breadth of inflationary pressure also held steady and should ease some of the Bank’s lingering concerns.

While the Bank remains laser-focused on inflation, its recent communication placed greater emphasis on economic slack, albeit with the caveat that monetary policy has limited ability to deal with tariffs. In this context, August retail sales provided some insight into consumer demand. Sales expanded in line with the flash estimate, largely driven once again by autos. However, the September flash estimate suggests demand deteriorated again. Parsing through the noise, retail sales have clearly lost momentum (Chart 2). This is particularly obvious in autos and home-related goods, which will likely weigh on durable goods spending. That said, some discretionary goods categories are still growing at a decent clip, while services spending, especially on travel, appears to have accelerated in Q3 as signalled by our internal spending data.

Beyond these mixed signals, the Bank has sufficient evidence of slack to justify one more rate cut, particularly given the subdued outlook for exports and investment. This weakness framed the Prime Minister Carney’s address to university students on Wednesday, where he announced an ambitious goal to double Canada’s non-U.S. exports over the next decade. Given the limits of monetary policy, the strategic fiscal push from November’s budget has the chance to shape Canada’s economic trajectory in the coming quarters and years. Let’s hope it proves as potent as the Prime Minister’s speech was inspiring.

U.S. – Persistent Inflation, Shutdown Pose Challenges for Federal Reserve

The ongoing government shutdown became the 2nd longest in history this week, as it stretched into week 4. With divisions in Congress largely unchanged relative to September, a resolution remains out of sight, but as the economic impacts become more material, intransigence will likely yield. Elsewhere in D.C., President Trump called off trade negotiations with Canada over the use of anti-tariff television advertisements broadcast in the U.S., forestalling a near-term trade agreement with the nation’s second largest trading partner. Despite political dysfunction in the Capitol and rising trade tensions in recent weeks, the S&P 500 still managed to rise 2% this week from a host of positive third quarter earnings reports.

While the Department of Labor remains unfunded, the CPI data for September was released on Friday owing to its use in the annual inflation adjustment to social security payments. The data showed that recent inflationary pressures moderated slightly in September but remained elevated on aggregate, with the three-month annualized percentage change in core CPI running above 3.5% (Chart 1). With price growth still well above the Fed’s 2% target and the timing of future data releases uncertain, policy decisions are expected to be cautious moving forward.

The shift in the Federal Reserve’s stance on monetary policy over the past few months came on the heels of a slowdown in the labor market, tracking of which has been obscured by the lapse in data releases. As the FOMC begins deliberations next week, they will likely assume that the slowdown persisted through September and opt to meet financial market expectations for a quarter-point rate cut. Chair Powell’s press conference will be closely watched for insights into how the policy response function of the Federal Reserve will adapt to a prolonged government shutdown, as inference becomes more difficult the further we are from the last official data release.

On the trade front, U.S. Treasury Secretary Bessent will be meeting with a Chinese delegation in Malaysia over the weekend. The deadline to reach some form of agreement is becoming tight, with President Trump’s threat of 100% tariffs on China starting November 1st. The President will also be travelling to Asia Friday night, with plans to visit Malaysia, Japan, and South Korea, culminating with the Asia Pacific Economic Cooperation (APEC) summit where he is expected to meet with his Chinese counterpart. Amid rising trade tensions in recent weeks, financial markets will be watching for any signs of de-escalation.

Markets will also be watching for several big tech earnings reports next week, including Microsoft, Apple, Alphabet, Amazon, and Meta, which collectively account for nearly a quarter of the S&P 500 (Chart 2). Given the high level of concentration in equity markets, growing concerns about elevated valuations, and the influence of these trends on the economy, these results will be monitored closely on the heels of Wednesday’s Federal Reserve decision.

Summary

United States: Fed Still Poised to Cut as Inflation Data Show Only Modest Gain

• The fire is not out for inflation, but the 0.2% rise in core CPI in September was the smallest in three months and keeps the Federal Reserve on track to deliver another 25 bps rate cut at its meeting this coming Wednesday. There were also signs of life in the existing home sales market this week.
• Next week: Consumer Confidence (Tue.), FOMC Meeting (Wed.)

International: Global Inflation Pressures and Emerging Resilience

• China’s Q3 GDP growth slowed but still exceeded expectations, rising 4.8% year-over-year, while several countries—including Canada, New Zealand and Japan—reported higher inflation readings this week. The UK was a notable exception, with inflation cooling. Meanwhile, PMI data from both the Eurozone and the UK surprised to the upside, pointing to a modest pickup in economic momentum heading into the final quarter of the year.
• Next week: Bank of Canada (Wed.), Bank of Japan (Thu.), European Central Bank (Thu.)

Topic of the Week: Crude Oil Pops Under Sanction Pressure

• The U.S. expanded sanctions on Russian oil firms this week, while maintaining hiked tariffs on Indian goods in an effort to pressure Moscow’s key export partner. Despite the spike in oil prices, elevated OPEC production and softer global demand point to continued easing in energy inflation into year-end.

Full report here. 

Gold jumped after US inflation report which added to strong expectations for Fed rate cut next week, as inflation rose slightly less than expected in September.

However, September’s CPI numbers were insufficient to spark stronger rally, as economists expect full impact of import tariffs to show in coming months and stronger inflate prices.

Metal’s price remains within the range of past three days after critical $4000 support contained sharp sell-off from new record high, but recovery attempts were so far limited and holding well below upper triggers at $4200 zone (daily Tenkan-sen / psychological) which previously acted as one of key supports.

Hourly studies lack positive momentum and weighed by overbought conditions and recent formation of 100/200HMA bear-cross that so far limits upside potential.

Structure on daily chart shows weakening signals as positive momentum continues to fade, although larger bulls are expected to remain in play while the action stays above $4K.

Gold is on track for the first weekly loss after a steep uptrend in nine straight weeks which may add to initial signals of potential deeper pullback in case of loss of $4000 trigger.

Otherwise, it will continue to look like a healthy correction of larger uptrend, though with lift above $4200 required to signal that bears have found first ground and continue to regain control.

Traders shift their focus on next week’s Fed policy meeting and release of US PCE Index (Fed’s preferred inflation gauge) which would provide fresh direction signals.

Res: 4161; 4200; 4237; 4292
Sup: 4100; 4057; 4000; 3972

• Cooling inflation boosts rate-cut hopes: U.S. CPI and core CPI both came in below expectations in September, fueling market bets that the Federal Reserve could cut interest rates as early as its next meeting, with another possible move in December.
• Markets rally on dovish expectations: Softer inflation data triggered gains across major U.S. stock indices, a drop in 10-year Treasury yields below 4%, and a weaker dollar against the euro.
• Risks and uncertainty remain: Despite easing price pressures, new tariffs, weak consumer sentiment, and potential data disruptions pose challenges for the Fed as it weighs balancing inflation control with supporting growth.

The September consumer inflation (CPI) report in the United States has provided markets with long-awaited signals of a potential shift in the Federal Reserve’s monetary policy. Both the headline CPI and its core measure came in below market expectations, increasing the likelihood of a rate cut at the upcoming Fed meeting — and possibly another one in December.

Inflation Weakens – CPI and Core CPI Below Forecasts

According to the published data, headline CPI rose by +0.3% month-on-month, compared to expectations of +0.4%, while core inflation — which excludes food and energy prices — increased by just 0.2%, the smallest gain in three months. On an annual basis, both indicators held steady at 3.0%, also below forecasts (3.1%).

United States CPI, source: tradingeconomics.com

A particularly notable development was the slowdown in housing costs. The owners’ equivalent rent, a key component of services inflation, rose by only 0.1%, marking its slowest monthly increase since early 2021. This reading may be seen by the Fed as confirmation that previous rate hikes are effectively curbing price pressures in the economy.

Room for Rate Cuts – Market Prices in Easing

In light of these figures, market expectations for monetary policy have shifted significantly. Investors are now pricing in an almost certain 25-basis-point rate cut at the Fed’s next meeting. Moreover, the probability of a second cut in December has increased — particularly since a potential federal government shutdown could prevent the release of additional inflation data before year-end, making the September report even more crucial.

Probability of interest rate cuts based on 30 Day Federal Funds Futures, source: CME Group

Although inflation is cooling, risks to the price outlook remain. New tariffs announced by President Donald Trump — including on kitchen and upholstered furniture — could raise the prices of imported goods in the coming months. Companies such as Procter & Gamble and O’Reilly Automotive admit that while they are currently absorbing higher costs through margins, they will increasingly be forced to pass them on to consumers.

Market Reaction: Stock Rally, Lower Yields, Weaker Dollar

Lower inflation and rising expectations of a looser monetary policy had an immediate impact on financial markets. Major U.S. stock indices recorded strong gains:

• Dow Jones up 1.17%,
• Nasdaq 100 up 1.14%,
• S&P 500 up 0.89%.

Daily chart of SP500, Dow Jones, NASDAQ100 and US10 yields, source: TradingView

Yields on 10-year Treasury bonds fell below the 4% level, signaling a shift in investor expectations about the future path of interest rates. Meanwhile, the U.S. dollar weakened, reflected in the EUR/USD exchange rate, which rebounded from 1.1580, which it reached on Wednesday. Whether these trends continue will depend on future Fed communications and potential confirmation of a rate cut decision.

Consumers Not Sharing the Optimism – Sentiment Weakens

It is worth noting, however, that despite market optimism, U.S. consumer sentiment has deteriorated. The University of Michigan index fell in October to 53.6 points, its lowest level in five months. Consumers continue to cite inflation and high living costs as their main sources of concern. Declining confidence could eventually weigh on consumption dynamics and, consequently, on the pace of economic growth.

Conclusions: Fed at a Crossroads – Markets Benefit, but Risks Persist

The September inflation data have clearly increased the likelihood of monetary easing by the Fed, already boosting equity indices and weakening the dollar against the euro. However, the Federal Reserve still faces the difficult task of balancing inflation control with support for the real economy.

New risks loom on the horizon — from protectionist tariffs and consumer uncertainty to the potential lack of further macroeconomic data due to government disruptions. In the coming weeks, not only the data itself but also the Fed’s communication and market reactions to every signal will be crucial for future movements on both Wall Street and the foreign exchange market.

Monday, Oct 27, 2025

Tuesday, Oct 28, 2025

Wednesday, Oct 29, 2025

Thursday, Oct 30, 2025

Friday, Oct 31, 2025

Summary

• We expect the FOMC to announce another 25 bps rate cut at the conclusion of its meeting on October 29. The government shutdown has clouded the U.S. economic outlook as most government data releases are currently delayed. The limited data that have been released suggest that gradual labor market softening has continued alongside inflation that is running at roughly a 3% underlying pace.
• We believe the shutdown is having a small but negative impact on the U.S. economy. The rule-of-thumb that each week of the shutdown shaves off 0.1-0.2 percentage points of quarterly economic growth still strikes us as reasonable. Most—though not all—of this output should be recouped in Q1, assuming that the shutdown has ended by then. If the shutdown drags on much longer, key economic data covering the month of October may be outright skipped rather than merely delayed, making it harder for policymakers to assess the state of the economy in real-time.
• Against this backdrop, several key FOMC officials have signaled support for another rate cut in October. However, public comments from FOMC officials generally have been careful to acknowledge that rate cuts past October are not guaranteed.
• We do not expect any major changes to the language in the post-meeting policy statement and expect Chair Powell's press conference remarks to echo the sentiment from his public remarks on October 14: inching toward neutral, but cognizant of the two-sided risks to the outlook given the current tension between their employment and inflation goals. There will not be an update to the Summary of Economic Projections at this meeting.
• Changes to the Fed's balance sheet runoff program also appear to be coming soon. Chair Powell suggested that runoff may end in the "coming months" in a recent speech. A wide range of indicators suggest this would be a prudent move, in our view. There has been a firming in repo rates recently in a sign that bank reserves are closer to ample than abundant. Furthermore, key thresholds have been reached or are close to being hit for the reserves-to-GDP rand reserves-to-bank assets ratios.
• Our longstanding forecast has been that the FOMC would announce the end of QT at its meeting on December 9-10, with balance sheet shrinkage ceasing after December 31. We are sticking with that forecast as a base case, although we acknowledge that it is a close call and the Committee may opt to end QT at the October meeting.
• If QT runs through year-end, the Fed's balance sheet will have declined by just shy of $2.5 trillion from its peak in the spring of 2022. We estimate the reduction in the central bank's security holdings has exerted 25-50 bps of upward pressure on long-term interest rates.
• Note that even if aggregate balance sheet runoff ceases, that does not mean that balance sheet policy has shifted to neutral. If the Fed's balance sheet is held flat for a couple quarters, then it will still be shrinking as a share of GDP. Furthermore, the composition of the balance sheet can continue to evolve such that policy accommodation is still being removed. We look for MBS runoff to continue indefinitely, with these securities replaced one-for-one with Treasury bills. If realized, this would gradually reduce support to the mortgage market from the Fed's balance sheet and put some very modest upward pressure on longer-term yields, all else equal.

Another Cut Coming in October

It has been a strange five weeks since the FOMC last met on September 17. At that meeting, the FOMC reduced the federal funds rate by 25 bps—its first rate move since December 2024. The dot plot showed a median projection of two more 25 bps rate cuts by year-end, although it was a close call; nine of the 19 participants looked for one or zero rate cuts at the final two meetings of the year. Shortly thereafter, the federal government shut down on October 1, and this created an economic data vacuum. The September employment report, scheduled to be released on October 3, has been indefinitely delayed. Many other key data releases, from housing starts to job openings to retail sales, have been delayed as well.

The limited data that we have received since the FOMC's last meeting suggest that the macro trends that were in place before the shutdown are still entrenched. The labor market news has been consistent with further gradual softening. ADP's measure of total private sector employment declined by 32K in September, the weakest reading since March 2023. With August's downwardly-revised ADP reading now sitting at -3K, the three-month moving average has fallen to just 23K (Figure 1), and monthly job growth has posted back-to-back negative readings for the first time since 2020. The Chicago Fed's Labor Market Indicators release estimated the September unemployment rate at 4.34%, a couple basis points above the actual reading in August. Encouragingly, state level data on initial jobless claims suggest layoffs have been relatively flat in recent weeks, but household sentiment about job availability deteriorated further last month (Figure 2).

On the inflation front, the September CPI report was released on October 24, nine days after its originally scheduled date. The catalyst to publish the September CPI stemmed from the need for the Social Security Administration to prepare the annual cost of living adjustment for beneficiaries. Because data collection for the September CPI had largely been completed before the shutdown began on October 1, the BLS was able to compile and release the report. It showed inflation that remains uncomfortably above the central bank's target. Headline CPI rose 3.0% year-over-year, the highest since January. The core CPI ebbed to 3.0% year-over-year, but the hotter 3.6% three-month annualized rate signals that prices accelerated in the third quarter (Figure 3). Higher prices continue to flow through to many tariff-related items in a sign that the price pressures from this year's new import duties are still making their way into the economy (Figure 4).

Beyond the data implications, we believe the shutdown is having a small but negative impact on the U.S. economy. At least 700K federal government workers have been furloughed without pay, while the remainder of the 2.3 million federal civilian workforce is still working—although also without pay. The rule-of-thumb that each week of the shutdown shaves off 0.1-0.2 percentage points of quarterly economic growth still strikes us as reasonable. Most—though not all—of this output should be recouped in Q1, assuming that the shutdown has ended by then. For further reading on the shutdown's impact, see our recent special report.

Against this backdrop, FOMC participants generally have signaled support for another 25 bps rate cut at the October meeting. Speaking on October 14, Chair Powell stated that "the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago." Governor Waller stated in a speech on October 16 that he supports a 25 bps rate cut to support the labor market. Federal Reserve Bank of Boston President and current FOMC voter Susan Collins shared her view that "with inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market." Comments from newly-appointed Governor Miran suggests he will once again vote for a 50 bps rate cut at the upcoming meeting. However, the public comments from FOMC officials generally have been careful to acknowledge that rate cuts past October are not guaranteed. A case in point: Governor Waller's October 16 talk was titled "Cutting Rates in the Face of Conflicting Data," a nod to the softer labor market, stronger real GDP growth and above-target inflation regime in which the FOMC finds itself.

Our expectation is that the FOMC will cut the federal funds rate by 25 bps at the October meeting. We do not expect any major changes to the language in the post-meeting policy statement, and in the press conference, we expect Chair Powell's remarks to echo the sentiment from his public remarks on October 14: inching toward neutral, but cognizant of the two-sided risks to the outlook given the current tension between their employment and inflation goals. Beyond October, we look for another 25 bps rate cut at the December meeting, and then we expect the FOMC to move to an every-other-meeting approach for rate cuts. We project two more 25 bps rate cuts in March and June 2026, followed by a long hold at 3.00%-3.25% for the federal funds rate.

QT Is Nearing the Finish Line

Changes to the Federal Reserve's balance sheet runoff program appear to be coming soon. At present, the Federal Reserve is reducing the size of its balance sheet through passive runoff, commonly referred to as quantitative tightening (QT). Treasury security runoff is subject to a cap of $5 billion per month, while mortgage-backed security (MBS) runoff is subject to a cap of $35 billion per month. In practice, MBS runoff has been averaging roughly $17 billion per month, so total QT has been a bit more than $20 billion per month on average.

The core of Chair Powell's October 14 speech was focused on the outlook for the balance sheet. In Chair Powell's words, the Fed's "long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision." A wide range of evidence has begun to build that bank reserves are closer to ample than abundant. There has been a general firming in repo rates since the end of the summer, with SOFR trading comfortably above IORB and the tri-party general collateral rate (TGCR) testing the upper-bound of the fed funds target range (Figures 5 and 6). It was the latter rate that Federal Reserve Bank of Dallas President Lorie Logan recently suggested as a future replacement for the federal funds rate as the central bank's target interest rate.

Looking beyond the recent moves in money market rates, past research on this topic also points to reserves becoming less abundant, even if they are not yet scarce. In a speech given on July 10, Governor Waller cited a bank reserves-to-GDP ratio of 9% as "the threshold below which reserves would not be ample." We estimate this ratio was 9.7% at the end of Q3, so not quite to Governor Waller's yardstick, but getting close. Research co-authored by Federal Reserve Bank of New York President John Williams cites a reserves-to-bank assets ratio of 12%-13% as another key threshold to monitor, and this level has been approximately reached.1

Our longstanding forecast has been that the FOMC would announce the end of QT at its meeting on December 9-10, with balance sheet shrinkage ceasing after December 31. We are sticking with that forecast as a base case, although we acknowledge that it is a close call and the Committee may opt to end QT at the October meeting. Although there has been some unexpected pressure and volatility in repo markets recently, it generally has been more mild than what occurred on the worst days of 2019 even when excluding the September repo blowup of that year (refer back to Figures 5 and 6). The Standing Repo Facility (SRF) is also in place to serve as a backstop (albeit an imperfect one) to the market which was not the case in 2019. Chair Powell's remarks on October 14 that QT may end in the "coming months" do not necessarily point to an immediate end to balance sheet runoff. Furthermore, we suspect the Committee will want to take a meeting to discuss what comes next for the balance sheet regarding its security composition.

If QT runs through year-end, the Fed's balance sheet will have declined by just shy of $2.5 trillion from its peak in the spring of 2022, a reduction in the central bank's security holdings that we estimate has exerted 25-50 bps of upward pressure on long-term interest rates.2 Note that even if aggregate balance sheet runoff ceases, that does not mean that balance sheet policy has shifted to neutral. If the Fed's balance sheet is held flat for an extended period of time, then it will still be shrinking as a share of GDP. Bank reserves will continue to decline gradually and in proportion to the growth in non-reserve liabilities on the Fed's balance sheet, such as currency in circulation.

Furthermore, the composition of the balance sheet can continue to evolve such that policy accommodation is still being removed. We look for MBS runoff to continue indefinitely as the Federal Reserve strives to reduce its mortgage holdings and slowly return to holding primarily Treasury securities. In order to keep the total size of the balance sheet unchanged amid ongoing MBS runoff, we look for the Federal Reserve to start buying Treasury securities such that they replace MBS paydowns one-for-one. Returning to a primarily Treasury security portfolio would reduce the support that the central bank lends to the mortgage market. The Federal Reserve's share of the agency MBS market has not been below 20% since the early 2010s, but this should be within reach in a few years if MBS runoff continues (Figure 9).

Another factor to consider is the weighted-average maturity of the central bank's Treasury security holdings. At present, the Federal Reserve's security holdings generally skew longer-dated than the overall Treasury market. The Federal Reserve T-bill holdings comprise just 5% of its Treasury security holdings despite T-bills accounting for roughly 22% of the overall Treasury market (Figure 10). Our base case is that the Federal Reserve will purchase Treasury bills to replace MBS as holdings of the latter continue to decline. Slowly replacing MBS with T-bills would reweight the Fed's balance sheet away from longer-dated securities and toward shorter-dated securities, putting some very modest upward pressure on longer-term yields, all else equal.

Endnotes

1 – Afonso, Gara, Domenico Giannone, Gabriele La Spada and John C. Williams. May 2025. "Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve." Federal Reserve Bank of New York.