US

USD is stabilizing after yesterday’s slide, Treasury yields are trading heavy and US equity futures are holding steady. We expect the FOMC to deliver a dovish cut because the US labor market is worsening. The private-sector added just 29k jobs on average in June, July, and August, well below the breakeven number for keeping the unemployment rate steady (between 80k and 100k).

If our Fed call pans out, USD will break lower against most major currencies and risk assets will rally. If we’re wrong and the Fed sticks to a patient easing guidance, USD can retrace all this week’s losses before consolidating within its August range.

The FOMC is widely expected to trim the target range for the Fed funds rate 25bps to 4.00-4.25% after keeping them on hold since January (7:00pm London, 2:00pm New York). The market price-in just 5% odds of a 50bps cut. The FOMC voting split, dot plots, updated economic projections and Fed Chair Jay Powell’s press conference will shape the extent of the Fed’s dovish tilt.

(i) FOMC vote split will likely show at least one dissent in favor of a 50bps cut and no dissent for keeping rates unchanged. The leading candidates to favor a jumbo cut are: Stephen Miran, Christopher Waller, and Michelle Bowman.

(ii) FOMC Dot Plots to imply more cuts are in the pipeline. We see 2025 at 3.625% (3 cuts), 2026 at 3.125% (2 cuts), 2027 at 2.875% (1 cut), 2028 and longer run at 2.875%. Of note, interest rate futures are pricing the funds rate to reach a low of nearly 2.80% over the next two years. In June, the FOMC median rate forecast for 2025 was 3.875% (2 cuts), 2026 was 3.625% (1 cut), 2027 was 3.375% (1 cut), and the longer run was 3.00%.

(iii) The new economic projection should reflect rising downside risks to employment. The FOMC median projection for the unemployment rate could be tweaked a tick higher across the forecast horizon.

(iv) Powell to lean dovish. We anticipate Powell to stress that the Fed will prioritize maximum employment over price stability within its dual mandate because policy is in restrictive territory.

CANADA

The Bank of Canada (BOC) is expected to cut the policy rate 25bps to 2.50% after being on hold since April (2:45pm London, 9:45am New York). The swaps market is pricing nearly 100% probability of cut today, followed by an additional 25bps cut by year-end to 2.25% and some odds that rates bottom at 2.00% over the next 12 months. No Monetary Policy Report is tied to this meeting. The next one is due at the October 29 meeting.

The BOC has room to ease. Canada’s labor market backdrop is deteriorating rapidly as the economy lost -65.5k jobs in August and -40.8k in July. Importantly, upside risks to underlying inflation is not materializing. Excluding food & energy, CPI dipped to a five-month low at 2.4% y/y vs. 2.5% in July while the average of core trim and median CPI printed at 3% y/y for a third consecutive month in August.

Bottom line: the BOC’s more dovish policy stance relative to the RBA and Norges Bank argues for further CAD underperformance against AUD and NOK.

UK

GBP ignored the UK August CPI report. Headline CPI matched consensus and Bank of England projection at 3.8% y/y for a second consecutive month. Core CPI was also in line with consensus at 3.6% y/y vs. 3.8% in July, while services CPI inflation eased more than anticipated to 4.7% y/y (consensus and BOE: 4.8%) vs. 5.0% in July.

Regardless, disinflationary progress remains slow. Core inflation has been above the 2% target for four years now and services inflation has averaged 4.9% y/y in the last year. Bottom line: the UK economy is skirting with stagflation which can further undermine GBP vs. EUR.

EUROZONE

The ECB remains in a good place to keep rates hold. The ECB’s negotiated wage tracker points to lower and more stable wage pressures consistent with the ECB’s 2% inflation target. The wage tracker with unsmoothed one-off payments - which closely matches the ECB’s indicator of negotiated wages - indicates an average negotiated wage growth of 2.9% y/y over 2025 vs. 4.8% in 2024 and easing further to 2.4% for the first half of 2026. Bottom line: ECB/Fed policy stance continues to underpin the uptrend in EUR/USD.

INDONESIA

IDR weakened after Bank Indonesia (BI) unexpectedly cut rates again. BI slashed the policy rate 25bps to 4.75% after a surprise cut last month, bringing its total easing to 150bps since September 2024. More easing is in the pipeline as the BI stressed that it continues to look for room to further lower interest rates with policy directed towards pushing economic growth.

Recent developments have raised concerns about BI’s independence. First, BI’s support for government programs via bond purchases and interest-cost sharing blurs the line blurs the line between monetary policy and fiscal financing. Second, a proposed bill would give Parliament more leeway to remove BI board members.

Bottom line: we expect IDR to keep underperforming against currencies of central banks that have credible monetary policy, like SGD or TWD.

BRAZIL

Brazil’s central bank is widely expected to keep rates at 15.00% for a second consecutive meeting (10:30pm London, 5:30pm New York). Brazil headline inflation has been persistently above the 1.5%-4.5% target band since October 2024. Brazil’s hefty real positive interest rates of nearly 10% act as a magnet for BRL.