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Dollar slides as markets price in rate cuts

Home >  Daily Market Digest >  Dollar slides as markets price in rate cuts


Written by:
Myrsini Giannouli

21 November 2023
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Important calendar events

  • GBP: Public Sector Net Borrowing
  • USD: Existing Home Sales, FOMC Meeting Minutes


The dollar continued its downward trajectory on Monday and the dollar index dropped below the 103.5 level for the first time since August. US treasury yields also declined, with the US 10-year bond yielding approximately 4.42%. 

The Fed’s hawkish stance over the past year has been paying off and US price pressures are cooling. Inflation in the US eased more than expected in October, driving down rate hike expectations and putting pressure on the dollar. 

Headline inflation rose by 3.2% year-on-year in October from a 3.7% reading in September and against expectations of a 3.3% print. Monthly CPI remained unchanged from the previous month in October, while markets were anticipating a 0.1% raise. Core CPI, which excludes food and energy, also surprised on the downside. Core CPI increased by 0.2% every month, compared to 0.3% anticipated.

US PPI data confirmed that price pressures in the US are easing. Monthly PPI shrank by a whopping 0.5% in October, falling below expectations of a 0.1% growth. Core PPI, which excludes food and energy, remained stable, against expectations of a 0.2% growth.

At the latest Fed meeting in November, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. The Fed has made it clear that its approach from now on will be data-driven and Tuesday’s inflation data have brought the odds of a rate hike in December to zero. Markets are always ahead of events and are already pricing at an end to the Fed’s tightening policy. Market odds of another rate hike in December have dropped to zero, while markets are pricing in rate cuts as early as March.

Market expectations of rate cuts have been driving the US dollar and treasury yields down. The Fed, however, has been relying on high treasury yields to complement its tightening policy. Plummeting treasury yields may derail the Fed's plans to end rate hikes or force the Fed to keep interest rates at high levels for longer.

The US economy seems to be recovering, boosting the dollar. Advance GDP data for the third quarter of 2023 showed that the US economy expanded by 4.9%, against expectations of 4.5% growth and far surpassing the 2.1% growth of Q2. Advance GDP price index for the 3rd quarter of the year reached 3.5%, exceeding expectations of a 2.7% print. 

One of the key events this week is the release of the Fed’s latest meeting minutes on Tuesday. The meeting minutes may provide valuable insight into the central bank’s future policy and are likely to affect the dollar.



EUR/USD extended gains on Monday, testing the 1.094 level resistance. If the EUR/USD pair declines, it may find support at 1.082, while further resistance may be encountered near 1.100. 

The economic outlook of the Eurozone appears to be deteriorating, putting pressure on the Euro. Flash GDP data for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year, which was in line with expectations. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening. 

The ECB decided to keep interest rates unchanged at 4.50% in October. Markets anticipate that the ECB has hit its rate ceiling, putting pressure on the Euro. The ECB is tasked with assessing the risk to the fragile Eurozone economy against high inflation rates. 

ECB President Christine Lagarde has hinted at an end to rate hikes. Lagarde highlighted the risks to the Eurozone economy stressing that the economy is likely to remain weak for the remainder of the year. Lagarde also stated that it is too early to talk about rate cuts and warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.

Final CPI data for the Eurozone last week showed that headline inflation in the Eurozone fell to its lowest level in two years in October, mainly due to a drop in energy prices. CPI cooled to 2.9% year-on-year in October from 4.3% in September. Core CPI Estimate, which excludes food and energy, eased to 4.2% year-on-year in October from 4.5% in September. The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth.

EURUSD 1hr chart



The GBP/USD rate edged higher on Monday as the dollar weakened, climbing above the 1.250 level. If the GBP/USD rate goes up, it may encounter resistance near 1.255, while support may be found near 1.237. 

CPI data showed that British inflation cooled more than forecast in October, reinforcing expectations that the Bank of England has ended its hiking cycle and will be cutting interest rates by the middle of next year. Headline inflation in the UK rose by 4.6% year-on-year in October, registering a dramatic drop from September’s 6.7% increase. Annual Core CPI, which excludes food and energy, grew by 5.7% in October versus 6.1% in September and 5.8% forecast.

Odds that the BOE has reached its rate ceiling are putting pressure on the Sterling. Markets are pricing in more than a 50% chance of rates being unchanged until June 2024. On the other hand, interest rates are expected to remain at their current 15-year high for a long time, with markets predicting a rate cut in August next year.

The BOE maintained its official rate at 5.25% at its latest meeting, which was in line with expectations. The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down. 

BOE Governor Andrew Bailey has stated that the central bank will be watching closely to see if further rate hikes are needed. Bailey has also emphasized that the BOE will be holding interest rates in restrictive territory long enough to see inflation down to the bank’s 2% target.

Recent fundamentals have shown that the British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Prolonged tightening has taken its toll on the labor market and other vital economic sectors.

UK GDP data revealed that the British economy remained stagnant during the third quarter of 2023. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter. Economic growth is slowing down in the UK and the country is on the brink of recession.

A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession. 

GBPUSD 1hr chart



The Yen continued to gain strength on Monday, and USD/JPY dropped below the 148.4 level. If the USD/JPY pair declines, it may find support near 145.8. If the pair climbs, it may find resistance at 152.

The Fed’s hawkish policy seems to be gradually coming to an end, relieving some of the pressure on the Yen, which has been weakened by the BOJ’s dovish policy. The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels. Japanese authorities have been repeatedly warning speculators against excessive short selling of the Yen and have stepped in several times in the past year to provide support for the Yen. 

The BOJ maintained its short-term interest rate target steady at -0.10% and that for the 10-year government bond yield around 0% set under its yield curve control, but redefined the 1.0% limit as a less restrictive ceiling rather than a rigid cap. Even though the BOJ tweaked its yield curve control policy slightly, markets were expecting a bigger shift in policy, and the Yen plummeted after the interest rate announcement. 

Preliminary GDP data last week showed that Japan's economy contracted in the third quarter of the year. The world's third-largest economy contracted by 0.5% in the third quarter against estimates of a 0.1% contraction. The Japanese economy expanded by 1.2% in the second quarter of 2023, showing that the country’s economy is shrinking and is on the brink of recession. Preliminary GDP Price Index showed a 5.1% annual expansion in Q2, versus 3.5% the previous quarter. This is a measure of inflation, which shows that inflationary pressures are rising in Japan, increasing the odds of a hawkish shift in the BOJ’s policy. 

National Core CPI dropped to 2.8% in September from 3.3% in August. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. 

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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