Important Calendar Events
The dollar rallied on Monday on increased risk aversion sentiment. The dollar index started below 107 on Monday but climbed to 108 during the day. US Treasury yields also started to recover, with the US 10-year bond climbing above 3.8%.
On Monday, reports that China has increased Covid measures, fuelled global recession concerns. Risk sentiment soured, favoring the safe-haven dollar. China grapples with a new Covid outbreak and authorities had to lock down Guangzhou’s largest center, while schools in Beijing closed. China’s economy has been crippled by zero-Covid measures and extended lockdowns.
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.
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. 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.
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%.
The Richmond Manufacturing Index is scheduled to be released on Tuesday for the US and may cause volatility in dollar prices. Fedspeak is also of primary importance this week, as traders will pay special attention to Fed members’ speeches in an attempt to gauge any changes in the central bank’s future policy direction. Several FOMC members are due to deliver speeches on Tuesday, which may affect the dollar prices.
The Euro lost strength against the dollar on Monday, with EUR/USD dropping to 1.022. 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.
The dollar’s recovery on Monday pushed down competing currencies, such as the Euro. Cooling German inflation on Monday failed to arrest the Euro’s decline. German PPI data for October declined by 4.2%, against predictions of a 0.9% increase. Easing price pressures in Germany remove some of the pressure on the ECB to hike interest rates.
Final Eurozone headline inflation hit an all-time high of 10.6% in October though. Surging inflation in the EU is 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.
This week, dollar action is expected to affect the Euro considerably. Economic activity indicators scheduled to be released on Tuesday for the Eurozone include Current Account and Consumer Confidence.
The Sterling retreated against the dollar on Monday, as risk sentiment soured. GBP/USD dropped to 1.177 early on Monday but pared some of its losses later in the day. If the GBP/USD rate goes up, it may encounter further resistance near 1.228, while support may be found near 1.133 and further down near 1.114.
On Monday, increased risk aversion sentiment boosted the safe-haven dollar against riskier assets, such as the Sterling. Renewed Covid restrictions and lockdowns in China gave rise to recession concerns, diminishing the appeal of riskier assets. The pound is also threatened by political uncertainty in the UK. Political instability has been playing a major part in the currency’s decline over the past few months, driving the pound to an all-time-low.
The much-anticipated fiscal plan of the new government was released last week and brought volatility to the Sterling, even though the new fiscal 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.
The Yen lost strength against the dollar on Monday, with the USD/JPY pair touching the 142.0 level. If the USD/JPY pair declines, it may continue testing the support at 138.4, while further support may be found at 130.4. If the pair climbs, it may find resistance at 146.9 and further up at 151.9.
Annual National Core CPI data released last week showed that inflation in Japan continues to rise. Japan’s 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. Hotter than expected inflation is mainly due to the high cost of imported energy.
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 a 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.
The USD/JPY rate is expected to hinge largely on the dollar’s movement this week, in the wake of last week’s US inflation report. Political developments in the US are also likely to affect the dollar, as markets digest the outcome of the US mid-term elections.
This week several important economic activity indicators are scheduled to be released for Japan and may affect the Yen. The Annual BOJ Core CPI on Tuesday and Annual Tokyo Core CPI on the 25th, may provide additional information on Japan’s inflationary outlook, following last week’s high inflation print.
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