Brief Analysis & Technical Outlook: EURUSD, GBPUSD, and USDJPY
After Fed Chair Powell’s latest comments at NABE on
October 14, 2025, the market is almost discounting 50 bps cumulative additional
rate cuts after 25 bps in September. Powell also indicated the end of QT
officially by Dec’25. Fed Fund Future is now discounting above 90% probability
of 25 bps rate cut each on October 29 and December 11, 2025, for a repo rate of
3.75%; i.e., total 75 bps rate cuts vs earlier estimate of 50 bps cumulative
rate cuts during September-December’25.
Fed Chair Powell Capitulated ?
Powell also indicated the end of QT by December’25
officially. But the Fed may continue its shedding of MBS and will replace it
with USTs gradually as a longer-term balance sheet strategy. Although the overall
impact is minimal, it may support lower US bond yields, while mortgage rates
may remain comparatively elevated for the next few years as the Fed will buy
additional USTs and allow full maturity of MBS (mortgage security bonds).
Overall, the Fed may cut -50 bps in Q4 vs 0 bps by
the ECB and 25 bps by BOE; for overall 2025, the Fed may cut cumulative -75 bps
vs 100 bps by the ECB and -100 bps by BOE, while BOJ may hike by +25 bps. Both
the ECB and BOE may close the QT by December '25, in line with the Fed.
Conclusions
Over the last few years, apart from BOJ, which has
its own issues, most of the major global central banks follow the Fed in their
monetary policies, which were largely in line. Even BOJ's YCC and 'exit'
jawboning policy is well anticipated. Thus, there were no major policy
divergence surprises. Also, all major central banks now closely coordinate
among themselves after the 2008 GFC (Global Financial Crisis). Almost all of
them are synchronizing monetary policies through known/pre-defined policy
instruments like rate actions, QE, and QT, affecting the demand side of the
economy, not the supply side directly.
Although officially BOJ maintains the YCC (Yield Curve Control) policy,
all major central banks unofficially do this indirectly through jawboning and
policy expectations.
Almost all of the major central banks are cognizant
of the fact that they need a comparatively weaker LCU (Local Currency Unit) to
stay competitive in exports, but also considering the impact of potentially
higher imported inflation, all of them try to keep a balanced monetary policy
and maintain a real policy differential. In fact, the US is the biggest client
for EU and UK exports. Thus, the ECB and BOE both intend to follow Fed policy
with a focus on not too much strength in their LCUs (EUR, GBP, and JPY). Weaker
LCUs are good for export to the heavy EU, UK, and Japan.
But in the last year, since Trump's election
prospect brightened, USD has been under pressure due to Trump trade war tantrum
2.0 and Trumpcession/US stagflation concern despite the more hawkish stance of
Fed than ECB and BOE. As a result, the US Dollar Index (DXY) slumped over 4%,
SPX-500, EUR, and GBP gained. Overall, stimulus-savvy SPX-500 soared almost 18%
for lower USD, positive for exports, hopes of Fed and Trump pivot (monetary
& fiscal stimulus), and AI/Tech optimism despite Trump trade/tariff war and
other headwinds, which can potentially push the US economy into stagflation or
even an all-out recession in 2026. Trump's unconventional/uncertain tariff,
immigration, deregulation, income tax cuts, and other fiscal policies/stimulus
are affecting both the supply and demand sides of the US and even the global
economy directly or indirectly. Although Germany and some other EU states and
even the UK are providing some fiscal stimulus in the form of higher
infrastructure & defense spending, they are much less aggressive than
Trump/US.
In the last year, German 10Y bond yield surged much
more than the US, UK, and Japan as Germany has launched a €500 fiscal stimulus
package (mainly EV and HSR-Transport infra) to boost the economy amid Trump
trade war tantrums. For this, Germany is taking public finance by issuing
bonds, a rare phenomenon, and the bond yield surged.
Looking ahead, as Trump's trade/tariff policies are
expected to get settled by Dec'25 without any major damage to the EU, UK,
Japan, and also the US economy, all major central banks will be in cautious
mode considering the likely inflationary impact on both sides of the Atlantic
as well as the Pacific. Thus, there may not be any meaningful divergence of
monetary policies between major global central banks (Fed, ECB, BOE, and BOJ).
But Trump's policies may continue to affect Wall Street.
Weekly/Positional
Technical Outlook: EURUSD, GBPUSD, and USDJPY
Looking at
the chart, whatever may be the narrative, technically, EURUSD (CMP: 1.16700) has to sustain above 1.16500
for any rebound to 1.17100 to 1.17600 and further to 1.18300 and 1.19500;
otherwise, sustaining below 1.16200, it may further fall to 1.15800 to 1.15300
and further 1.14400 to 1.12800 in the coming days.
Similarly,
GBPUSD (CMP: 1.34000) now has to
sustain above 1.34300 for a rebound to 1.34800 to 1.35300 and further to
1.36300 to 1.38000; otherwise, sustaining below 1.34100, GBPUSD may further
fall to 1.33500 to 1.333000 and further to 1.32000 to 1.31000 in the coming
days.
Similarly, USDJPY (151.80) now has to
sustain above 152.50 for a further
rally to 153.00 to 153.50, and only sustaining above that, may further surge to
157.00 to 159.00 and 160.00 to 161.85; otherwise, sustaining below 152.00,
USDJPY may further fall to 150.50 to 149.00 and 148.00 to 146.75 to 145.50 in
the coming days.
Bottom
line:
Overall, the USD trajectory will depend on the
Fed's and Trump's near-term stance and its effect on the real economy.
