Important calendar events
The dollar edged lower on Tuesday, pushed down by declining US yields. The dollar index fell almost to the 110 level, while competing currencies, such as the Euro, rallied. US Treasury yields also retreated, with the US 10-year bond yield dropping near 0.36%, after reaching 15-year highs of 4.0% last week.
Hawkish Fed rhetoric propelled the dollar to fresh 20-year highs last week on expectations of steep rate hikes. The dollar had been trading in overbought territory and has been suffering a correction for the past few days, despite continued hawkish Fed rhetoric. Fed’s Jefferson stressed on Tuesday that inflation remains the central banks’ most serious problem and warned it may take some time to control.
US inflation does not show signs of cooling at the expected rate, despite the Fed’s efforts. Core PCE Price Index, the Fed’s favorite inflation gauge, increased 0.6% month-on-month in August, compared to a forecast of 0.5%, with the annual reading climbing to 4.9%. Inflation in the US remains high, putting pressure on the Fed to maintain its hawkish stance. Odds of another steep rate hike at the Fed’s next policy meeting in November increased, providing support for the dollar.
US economic data released on Tuesday were disappointing, pushing the dollar down. JOLTS Job Openings fell to 10.5M in August, compared to 11.17M the previous month and 11.07 projected, indicating that the labor market may be cooling.
The US Federal Reserve has recently voted to raise its interest rate by 75 basis points 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%.
ISM Services PMI data are scheduled to be released on Wednesday for the US, which are strong indicators of economic health.
The Euro soared on Tuesday, as the dollar declined, with the EUR/USD pair almost touching the parity level. If the EUR/USD pair declines, it may find support near the 0.961 level and further down at the 0.845 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at 1.005 and further up at 1.019.
The Euro gained support from the dollar’s decline on Tuesday, as well as from improved risk sentiment. ECB President Christine Lagarde delivered a hawkish speech on Tuesday, boosting the Euro even further. Lagarde stated that The European Central Bank must at a "minimum" stop stimulating the economy through its monetary policy, pointing to further rate hikes ahead to combat inflation.
Eurozone inflation is on the rise, intensifying the EU’s economic crisis. Eurozone inflation reached double digits in September, climbing to 10% on an annual basis, compared to 9.1% in August, beating estimates of 9.7%. Inflation in the EU is expected to rise even further in the following months driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation.
Soaring EU inflation rates and hawkish ECB rhetoric increase the odds of a 75-bp rate hike at the Bank’s next meeting in October. The Euro has been pushed down by the gap in interest rates with the US. The US Federal Reserve recently 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. Soaring inflation rates in the EU increase the chances of another 75-bp rate hike in October, boosting the Euro.
Economic activity indicators released last week for the Eurozone were overall disappointing though, pushing the Euro down. In addition, Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. EU’s energy crisis intensified last week, as there were leaks in three major Russian gas pipelines, raising suspicions of sabotage. High energy costs in the Eurozone are driving the Euro down, while inflationary pressures mount.
Spanish, Italian, French, and German Services PMI, as well as EU Final Services PMI data are scheduled to be released on Wednesday and may provide information on the economic outlook of the EU.
The Sterling benefitted from a softer dollar on Tuesday and the GBP/USD rose above the 1.145 level, testing the resistance near 1.146. If the GBP/USD rate goes up, it may encounter further resistance near 1.173, while support may be found at the new all-time low of 1.035.
The Sterling has recovered almost all of its losses, after collapsing near parity with the dollar last week. The announcement of the new government’s first ‘mini-budget’ drove the pound to an all-time low. 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 included major tax cuts, which the British government would fund through borrowing at a time when the country is facing a debt crisis.
British Prime Minister Liz Truss defended the budget last week, with the new Government receiving heavy criticism for some parts of the plan. On Monday however, the British Government made a U-turn, scraping some of the most controversial parts of the mini-budget. The heavy tax cuts originally planned, would primarily benefit the highest earners in a time of heightened economic pressure on British households. The announcement of the decision to reverse the tax cuts has propped up the Sterling.
The BOE had to resort to a new bond-buying program last week, to restore order to markets. The BOE aimed to stem the sell-off in the UK gilt market by buying long-dated gilts, which have been strongly affected by repricing.
Recession concerns are weighing the currency down as the BOE continues to tighten its monetary policy to bring inflation under control, although annual inflation in August dropped to 9.9% from 10.1% in July. The Bank of England raised its interest rate by 50 bps in its latest meeting, bringing the total interest rate to 2.25%. 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.
UK economic outlook remains poor, though. 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%.
UK Final Services PMI data are scheduled to be released on Wednesday, which are strong indicators of economic health.
The Yen gained strength on Tuesday, as the competing dollar continued to decline. The USD/JPY pair moved firmly below the 145 key level, dropping sharply to 144. 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 Tokyo Core CPI for September released on Tuesday was at 2.8%, which was in line with expectations and higher than the previous month’s 2.6%. Inflation in Japan continues to increase past the BOJ’s 2% target, burdening households.
The USD/JPY 145 level seems to be a line in the sand for the Japanese government, which rushes to intervene when the currency pair crosses this level. The Japanese government recently intervened to stem the Yen's weakness after the currency pair threatened to cross that level. The Japanese Ministry of Finance intervened in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. On Monday, Japanese Finance Minister Shunichi Suzuki stated that Japan is ready to take action to stabilize the exchange rate. The news propped up the Yen which had crossed the 145 level against the dollar early on Monday.
In its latest 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 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 last week and the wide difference in interest rates is putting pressure on the Yen.
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