Important calendar events
The dollar was volatile on Wednesday with the dollar index moving above 114.5 early in the day but sliding back to below 113 later in the day. US Treasury yields were similarly affected, with the US 10-year bond yield dropping from above 4.0%, its highest value since 2007, to below 3.8%.
The dollar, which had been trading in overbought territory, retreated on Wednesday. US economic indicators released on Wednesday were lower than expected, driving the dollar down. Pending Home Sales fell by 2.0%, compared to a drop of only 0.6 the previous month.
Hawkish Fed rhetoric had propelled the dollar to fresh 20-year highs earlier this week, as markets are anticipating further rate hikes. FOMC member James Bullard delivered a hawkish speech on Tuesday, emphasizing the risks of increased inflation and minimizing recession concerns, stating that recessions fears should be more on a global basis than a U.S. basis. FOMC member Loretta Mester also delivered a hawkish speech, stating emphasizing that further rate hikes are needed to bring rampant inflation under control. Federal Reserve Chair Jerome Powel has also raised expectations of future rate hikes, stating that the Fed is determined to curb inflation even at the expense of economic growth.
The US Federal Reserve voted to raise its interest rate by 75 basis points last week to curb soaring US inflation rates. The US Central Bank has increased interest rates by a total of 300 basis points this year, bringing its benchmark interest rate from 2.50% to 3.25%.
US policymakers have downgraded their GDP estimates while revising upwards the inflation outlook. Inflation in the US is not cooling at the expected rate, putting pressure on the Fed to maintain its hawkish stance. CPI increased by 0.1% in August and Annual CPI through August increased by 8.3%, prompting the Fed to continue tightening its monetary policy.
Several important economic activity indicators are scheduled to be released on Thursday for the US and may affect the dollar in the wake of last week’s policy meeting. In particular, final GDP and Unemployment Claims may provide indications of the US economic outlook. In addition, FOMC member Mester is due to deliver a speech on Thursday, which may cause some volatility in the currency.
The Euro gained strength late on Wednesday, benefitting from the dollar’s weakness and the EUR/USD pair climbed to 0.973. If the EUR/USD declines further it may find support near the the0.961 level and further down at the 0.845 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at 1.019 and further up at 1.036.
On Wednesday, ECB President Christine Lagarde delivered a decisively hawkish speech, stating firmly that the ECB will continue raising interest rates at the EU Central Bank’s next few meetings. Other ECB members also maintained a hawkish tone, not discounting the possibility of a 75-bp rate hike at the Bank’s next meeting in October.
The Euro retreated last week after a hawkish Fed policy meeting and statement boosted the dollar. The US Federal Reserve voted to raise its interest rate by 75 basis points, bringing its benchmark interest rate to 3.25%. In its latest monetary policy meeting, the ECB raised its benchmark interest rate by 75 basis points as well, but its interest rate is still only 0.75%, putting pressure on the Euro.
Last week, Russian President Vladimir Putin renewed threats to halt energy exports and threatened western allies with nuclear action. Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. This week, the EU’s energy crisis intensified, as leaks in three major Russian gas pipelines raised suspicions of sabotage. High energy costs in the Eurozone are driving the Euro down, while inflationary pressures mount.
The results of the Italian elections on Sunday are also weighing down the Euro. Right-wing politician Giorgia Meloni won the elections, causing skepticism and anxiety in the Eurozone.
Eurozone inflation hit a record high of 9.1% in August on an annual basis, as price pressures increased despite the fall in global fuel prices. Inflation in the EU is expected to rise even further in the following months, possibly reaching double digits, driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation.
The Sterling exhibited high volatility on Wednesday, plummeting early in the day after the BOE announced a bond-buying program, but rallying strongly later in the day, benefitting from the dollar’s decline. The GBP/USD rate sank to the 1.054 level on Wednesday morning but then climbed back to 1.090. If the GBP/USD rate goes up, it may encounter resistance near the 1.146 level and higher up near 1.173, while support may be found at the new all-time low of 1.035.
The BOE announced a new bond-buying program on Wednesday, with the object to restore order to markets. The BOE aims to stem the sell-off in the UK gilt market by buying long-dated gilts, which have been strongly affected by repricing. The Sterling dropped after the BOE’s announcement but recovered later in the day after the dollar fell.
The Sterling hit an all-time low on Monday, as recession concerns are weighing the currency down. The pound had already taken a beating last week after the BOE delivered a lower-than-expected rate hike. BOE Governor Andrew Bailey stepped in on Monday to provide some support for the currency by announcing that the BOE would not hesitate to change interest rates if needed. The announcement propped up the Sterling briefly and raised expectations of an emergency rate hike. As, however, it became clear that there would be no emergency intervention, the pound started to retreat towards the new all-time low again.
Last week, the new British Chancellor, Kwasi Kwarteng, announced a preliminary budget including substantial tax cuts and energy subsidies. The announcement of the budget was met with skepticism by markets, and the Sterling tumbled. The budget includes major tax cuts, which the British government will fund through borrowing at a time when the country is facing a debt crisis. On Monday, the Sterling collapsed nearing parity with the dollar, as markets pondered the implications for the economy of the new government’s first ‘mini-budget’.
The Bank of England raised its interest rate by 50 bps last week, bringing the total interest rate to 2.25%. Markets were expecting a steeper rate hike, with odds favoring a 75-bp raise. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. In contrast, the Fed is ramping up efforts to combat US inflation by raising its interest rate by 75 basis points last week.
UK economic outlook remains poor, with high inflation and rising recession concerns, although annual inflation in August dropped to 9.9% from 10.1% in July. The BOE has warned that recession is expected to hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024 with GDP falling to 2.1%.
The Yen gained strength against the dollar on Wednesday with the USD/JPY rate dropping to the 144 level. The Yen’s weakness had prompted an intervention last week, as the currency pair had threatened to cross the 145 level. If the USD/JPY pair falls, support might be found near 141.5 and further down at 138.0. If the pair climbs, it may find further resistance at the 145 level and higher up at the 1998 high of 147.7.
The BOJ Monetary Policy Meeting Minutes were released on Wednesday and provided a little support for the currency. The meeting minutes indicated that BOJ members were concerned about Japan’s rising inflation and the weakening yen. It is clear, however, that the BOJ does not intend to change its monetary policy to support the ailing currency.
Instead, the Japanese government intervened to stem the Yen's weakness last week after it became clear that the BOJ would not move to support the currency. The Japanese Ministry of Finance intervened in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. Japan's Vice Finance Minister for international affairs Masato Kanda stated that the government has taken decisive action to support the Yen, which had crossed the 145-mark with the dollar. The sudden move propelled the Yen upwards. This week though, the Yen retreated again, as the intervention provided only a temporary boost and further interventions seem unlikely.
BOJ Governor Haruhiko Kuroda made a speech in support of Japan’s recent bond-buying program on Monday, defending the intervention. Markets, however, seemed unfazed by Kuroda’s support, especially as the BOJ does not seem to have any intention to act in support of the Yen, and the currency continued to slide.
In last week's monetary policy meeting, the BOJ maintained its ultra-easy monetary policy, keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The BOJ also kept the target for the 10-year bond yield at 0%. The BOJ keeps bond yields low, weakening the Yen. BOJ Governor Haruhiko Kuroda re-affirmed the BOJ’s commitment to maintaining economic stimulus, stating that the Bank would provide further easing if necessary and was prepared to maintain its dovish stance for a long time.
The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down. The US Federal Reserve voted to raise its interest rate by 75 basis points on Wednesday to curb soaring US inflation rates. While the Fed rate hike was in line with market expectations and had largely been priced in, the wide difference in interest rates is putting pressure on the Yen.
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