Important Calendar Events
The dollar slipped in early trading on Monday but gained strength later in the day. The dollar index climbed to 106.7 on hawkish Fed rhetoric. US Treasury yields also gained strength late on Monday, with the US 10-year bond yielding over 3.7%.
The minutes of the latest Fed meeting released last week indicated no consensus among Fed members, leading to mixed signals for the markets. Fed rhetoric on Monday was hawkish once again though, boosting the dollar. Fed’s Williams stated that he sees higher interest rates into 2023 than anticipated and doesn’t expect rate cuts before 2024. FOMC member Bullard delivered an aggressively hawkish speech, emphasizing the need to raise interest rates to bring inflation down. Fed’s Mester also stressed that the US central bank is not close to a pause on tightening.
The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.
Several important economic data are scheduled to be released on Tuesday for the US and may affect the dollar, especially the CB Consumer Confidence, which is a leading indicator of economic health.
The Euro gained strength in early trading on Monday but collapsed later in the day. EUR/USD touched 1.050, before paring its gains, dropping 1.034. If the EUR/USD pair declines, it may find support at the parity level and further down near 0.973. If the currency pair goes up, it may encounter further resistance near 1.061.
ECB rhetoric on Monday remained but ECB President Christine Lagarde was more cautious in her speech. Lagarde reiterated the need to bring Eurozone inflation down but stressed that far and how quickly rates must rise will be determined by several factors. ECB’s de Cos was more aggressively hawkish in his speech, stating that Hikes so far are not enough to return inflation to the ECB’s goal.
In its latest monetary policy meeting, the ECB raised its interest rate by 75 basis points to 1.5%, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Market odds are currently in favor of a 50-bps rate hike at the ECB’s next monetary policy meeting.
Final Eurozone headline inflation hit an all-time high of 10.6% in October, mainly due to the high cost of energy. Even though Eurozone inflation reached record highs in October and was much higher than September’s print of 9.9%, it was slightly lower than the preliminary estimate of 10.7%.
Eurozone economic outlook is poor, showing signs that the EU is entering a recession, limiting the ECB’s ability to raise interest rates. Eurozone GDP grew by 0.2% in the third quarter of 2022 as expected. Economic expansion is slowing down, following a 0.7% GDP growth in the second quarter. Analysts are predicting stagnation later this year and in the first quarter of 2023. Stagflation becomes a real headache for the ECB, which will be forced to battle inflation without the support of a robust economic background.
German Preliminary CPI and Spanish Flash CPI data are due on Tuesday and may affect the Euro, ahead of the Eurozone inflation data on Wednesday.
The Sterling plummeted on Monday, with the GBP/USD rate dropping to 1.195. If the GBP/USD rate goes up, it may encounter resistance near 1.228, while support may be found near 1.176. A risk aversion sentiment prevailed on Monday, benefitting the safe-haven dollar at the expense of riskier assets, such as the Sterling.
Political developments in the UK have put pressure on the Pound once more. Deputy prime minister Dominic Raab is being investigated after complaints surfaced that he has breached the ministerial code. An independent investigation has been launched into the actions of the Deputy Prime Minister and prime minister Rishi Sunak will eventually deliver judgment on Raab’s conduct.
UK inflation hit a 41-year high in October, as annual CPI climbed to 11.1%, its highest value since 1981. October’s inflation exceeded September’s print of 10.1% and expectations of 10.7%. Inflation in the UK continues to rise, mainly due to the high cost of energy. Annual core CPI, which excludes food and energy, printed at 6.5%, exceeding expectations of 6.4%. Rising UK inflation is forcing the BOE to make some tough choices against a weak economic backdrop.
The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. UK monthly GDP for September dropped by 0.6%, against expectations of a more modest, 0.4% drop, indicating that the country is already in the grip of recession. Quarterly preliminary GDP for the third quarter of 2022 also came out negative, printing at -0.2%, compared to a 0.2% growth in the second quarter. The BOE predicts that the recession could last for almost two years, with expansion not expected again till mid-2024.
BOE members voted to increase interest rates by 75 bps at the latest monetary policy meeting. Currently, the BOE’s interest rate is at 3.0% and the difference with the Fed’s rate of 4.0% is putting pressure on the Sterling. The BOE will also be introducing another round of gilt sales this month, as they shrink their balance sheets.
Several economic activity indicators are scheduled to be released on Tuesday for the UK and may affect the Sterling, including M4 Money Supply, Mortgage Approvaand ls, and Net Lending to Individuals. BOE Governor Andrew Bailey’s testimony before the Lords Economic Affairs Committee, in London on Tuesday may also cause volatility in the pound.
The Yen gained strength in early trading on Monday but pared gains later in the day, with the USD/JPY pair touching the 139 level. If the USD/JPY pair declines, it may find support at 138.4, while further support may be found at 130.4. If the pair climbs, it may find resistance at the psychological level of 145.0 and further up at 146.9.
In its latest policy meeting, the BOJ left its monetary policy unchanged, as expected. 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 difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
BOJ CPI for October rose to 2.7% on an annual basis, against 2.0% in September and 2.2% predicted. Hotter than expected inflation in Japan is mainly due to the high cost of imported energy. National Core CPI data also indicated that inflation in Japan continues to rise. National CPI rose by 3.6% year-on-year in October, beating expectations of a 3.5% rise. October’s data are much higher than September’s 3.0% print, indicating that Japan's price pressures continue to rise.
Recent preliminary GDP data were disappointing, showing that Japan’s economy shrank in the third quarter of 2022 by 0.3%, against expectations of growth of 0.3% and 0.9% growth in the previous quarter. The annual Preliminary GDP Price Index printed at -0.5%, indicating that the Japanese economy is contracting, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.
Several economic activities and health indicators are scheduled to be released on Tuesday for Japan, including the Unemployment Rate and Retail Sales.
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