Important Calendar Events
The dollar edged lower on Tuesday, as Fedspeak turned more cautious. The dollar index dropped from 107.7 in early trading, to 107.1 later in the day. US Treasury yields also declined, with the US 10-year bond dropping from 3.83% to 3.76%.
Fed rhetoric is especially important this week as it may provide hints on the US central bank’s direction after recent soft inflation data. Fed rhetoric remained hawkish on Tuesday, although cautiously so, putting pressure on the dollar. The consensus between FOMC members seems to be that although inflation is cooling, further tightening will be required to bring inflation down consistently to the central bank’s 2% target.
FOMC member Mary Daly stated on Monday that a 75-bp rate hike is still on the table, emphasizing that one month’s cooling inflation print is not sufficient to pause rate hikes. Fed’s Loretta Mester reaffirmed on Tuesday that Maintaining price stability is a critical objective that will be accomplished using all available means. She stressed that interest rates should be increased further, but hinted at the possibility of a slower pace.
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.
US CPI and PPI inflation data in October were below expectations, indicating that inflation is cooling faster than expected. Annual CPI printed at 7.7%, compared to 8.2% in September and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes. Market expectations of future rate hikes were considerably trimmed after the inflation reports, causing the dollar to plummet. Slowing price pressures may induce the Fed to pivot towards a more dovish policy, reducing the aggressiveness of future rate hikes.
The US mid-term Congressional elections have put pressure on the dollar, but as markets began to digest the outcome of the elections, the dollar started to recover. The results of the elections were close, with the votes being tallied for a week. Republicans eventually wrested control of the House from the Democrats, winning the elections with a narrow majority. The Democratic party has lost control of the Senate and will find it hard to push its economic and political agenda in the future.
Flash Services and Manufacturing PMI data due on Wednesday are important indicators of economic health and may provide information on the economic outlook of the US. The minutes of the latest FOMC meeting are also scheduled to be released on Wednesday and may affect the dollar price.
The Euro edged higher on Tuesday, benefitting from the dollar’s decline, with EUR/USD climbing to the 1.030 level. 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.
Economic activity indicators released on Tuesday for the Eurozone were mostly optimistic, boosting the currency. The current Account in the EU remains in the negative range, as the value of imported goods in the Eurozone exceeds the value of exports. Current account printed at -8.1B for September, which was more positive than August’s reading of -26.9B though and exceeded expectations of -20.3B. EU Consumer confidence also improved, printing at -24 for October, against expectations of -26 and September’s value of -28.
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%. Lower than-expected inflation caused the Euro to retreat on Thursday, as it eases a little the pressure on the ECB to raise interest rates.
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. Annual EU GDP growth was in line with expectations, printing at 2.1%. Analysts are predicting stagnation later this year and in the first quarter of 2023.
Even though further ECB rate hikes seem certain, the magnitude of the hikes may decrease if the EU shows signs of entering a recession. Stagflation becomes a real headache for the ECB, which will be forced to battle inflation without the support of a robust economic background. 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.
Important economic activity indicators scheduled to be released on Wednesday for the Eurozone include Flash Services and Manufacturing PMI data. These are important indicators of economic health and may provide information on the EU economic outlook.
The Sterling edged higher on Tuesday, as the dollar retreated. GBP/USD traded with low volatility, climbing to 1.189. If the GBP/USD rate goes up, it may encounter resistance near 1.202 and further up at 1.228, while support may be found near 1.133 and further down near 1.114.
UK Public net sector borrowing continued to increase in October. Data released on Tuesday showed that the UK public sector has a budget deficit of 12.7B in October, which was lower than the 19.1B expected, however, and the 16.9B deficit recorded in September.
The much-anticipated fiscal plan of the new government was released last week and brought volatility to the Sterling, even though the new financial statement contained few surprises. The fiscal statement was a complete reversal of the previous government’s controversial budget and aims to fill a 55-billion-pound hole in Britain's budget. Chancellor Jeremy Hunt will be cutting government spending in an attempt to restore public finances. Hunt also plans to freeze thresholds and allowances on income tax, national insurance, and pensions for a further two years.
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.
At the latest monetary policy meeting, BOE members voted to increase interest rates by 75 bps. 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.
UK Flash Services and Manufacturing PMI data due on Wednesday are important indicators of economic health and may provide information on the economic outlook of the UK.
The Yen rallied on Tuesday as the dollar edged lower, with the USD/JPY pair touching the 142.0 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.
BOJ Core CPI data on Tuesday exceeded expectations, providing support for the Yen. 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 released last week 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 price pressures continue to rise in Japan.
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.
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.
Japanese authorities recently staged interventions to support the Yen, as evidenced by the currency’s sudden surges after the USD/JPY moved above the psychological level of 150. The Japanese government cannot support the Yen indefinitely, however, as continuous interventions would not be sustainable.
Wednesday is a Bank Holiday for Japan, with low volatility expected for the Yen.
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