• Markets are preparing for next week’s US election
• Key US data on Friday, a week before the Fed meeting
• Another strong set of data could endanger the Fed rate cut
• The dollar could get a meaningful boost against the yen

US election in the spotlight

The US presidential election continues to monopolize the market’s interest. While the outcome is uncertain, most investors have a pretty good idea of the economic agendas of both candidates. Former president Trump is probably gearing up for a repeat of his first term of protectionism and trade wars, while Vice President Harris is expected to continue in President Biden’s footsteps.

Amidst these developments, the Fed is meeting next week. While its easing path might potentially be affected by the US election result, next week’s decision will most likely depend on the economic progress made since mid-September.

Will the US data continue to surprise?

Since the September 18 Fed gathering, US data has been decent with inflation, retail sales and durable goods orders surprising on the upside. However, the labour market remains the critical factor in the Fed's decision-making process. In this context, on Friday, the October jobs report will be published.

Economists forecast an 115k rise in non-farm payrolls, following a sizeable 254k increase in September, with both the unemployment rate and average earnings growth expected to remain stable at 4.1% and 4% respectively. It is worth nothing that there is a small possibility of this data being affected by the recent Hurricane Helene.

Wednesday’s ADP print and Thursday’s weekly jobless claims figures have potentially opened the door to an upside surprise on Friday, despite the fact that market participants are fully aware of the very weak correlation between the ADP report and the non-farm payroll data.

Could next week’s Fed rate cut be under threat?

The market is very confident that, regardless of Friday’s data, a rate cut will be announced next week, currently assigning a 95% probability for this move. However, following the stronger US data in mid-October, certain Fed hawks openly talked about a pause in November. 

A strong set of figures, especially a non-farm payrolls print above 250k, could really add weight to their arguments. While the Fed rate cut seems to be safe at this stage, a decision taken with a slight majority could mean that the Fed’s rates outlook is more uncertain than currently foreseen.

On the flip side, a downside surprise in Friday’s data releases would confirm the universally expected outcome of the November 7 Fed meeting, potentially forcing the hawks to take a back seat and just follow Chairman Powell’s lead.

Dollar/yen rally pauses temporarily

The constant stream of strong US data, the imminent US election and the inconclusive outcome of the recent Japanese general election have pushed dollar/yen higher. Another positive set of US data releases on Friday could add to the recent bullish move with dollar bulls trying to push dollar/yen comfortably above the 154.52 level. On the other hand, weaker data prints could open the door to a selloff, which could become more protracted if the bears manage to break below the 151.54-151.94 area.