Important Calendar Events
The dollar was steady on Tuesday, with the dollar index maintaining the 105 level and reaching 105.5. US Treasury yields also remained steady, with the US 10-year bond yielding close to 3.5%.
US Trade balance data released on Tuesday were more optimistic than expected, providing support for the dollar. US trade balance for October printed at -78.2B against expectations of -80.1B, indicating that the value of imported goods in the US remains higher than the value of US exports.
The next US Fed monetary policy meeting is scheduled for next week on the 14th and traders are attempting to gauge the Fed’s intentions ahead of the meeting. A Fed blackout period has started on Saturday, which will last until the meeting, during which FOMC members do not deliver speeches that may reveal the central bank policy direction. The dollar maintained low volatility this week in the absence of more significant economic indicators and Fed rhetoric.
Market expectations of future rate hikes were considerably trimmed in the past couple of weeks on cooling US inflation. US headline inflation printed at 7.7% year-on-year in October, compared to 8.2% in September. Fed Chair Jerome Powell delivered an unexpectedly dovish speech last week, stating that he sees rate hikes slowing down as soon as December.
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.
Minor economic activity indicators are scheduled to be released on Wednesday, including Revised Nonfarm Productivity, Revised Unit Labour Costs, and Consumer Credit.
The Euro fell against the dollar on Tuesday, with the EUR/USD dropping to the 1.046 level. If the EUR/USD pair declines, it may find support at 1.029 and further down the parity level. If the currency pair goes up, it may encounter resistance at 1.061.
German Factory Orders released on Tuesday were higher than expected, providing support for the currency. German Factory Orders expanded by 0.8% in October against expectations of a 0.2% growth and a drop of 2.9% in September.
ECB rhetoric remains hawkish, with ECB President Christine Lagarde stressing the need to bring Eurozone inflation down. Lagarde has also stated though that how far and how quickly rates must rise will be determined by several factors.
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.
Eurozone headline inflation showed signs of cooling in November, after hitting an all-time high in October. Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October, against expectations of a 10.4% print.
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.
Several economic activity indicators are scheduled to be released on Wednesday for the Eurozone, including German Industrial Production, French Trade Balance, Italian Retail Sales, Final Employment Change, and EU Revised GDP.
The Sterling weakened on Tuesday, as the dollar edged higher, with the GBP/USD rate dropping to 1.212. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.176 and further down near 1.035. Risk sentiment was renewed on Tuesday, benefitting riskier assets like the Sterling.
BOE Governor Andrew Bailey addressed the House of Lords last week in a speech that was less hawkish than expected, driving the Sterling down. Even though Bailey stated that the BOE was likely to continue raising interest rates, his stance was more moderate than expected, pointing to a slowing pace of rate hikes.
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. 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.
The next BOE monetary policy meeting is scheduled for next week on the 15th, a day after the Fed’s policy meeting. At their 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 traded sideways against the dollar on Tuesday, with the USD/JPY pair fluctuating around the 136.5 level. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 142.2 and further up at the psychological level of 145.0.
Economic activity indicators released on Tuesday for Japan were overall mixed, providing slight support for the Yen. Average Cash Earnings rose by 1.8% year-on-year in October, against expectations of a 2.2% gain and a 2.2% rise in September. On the other hand, household spending rose by 1.2% in October, versus the 0.9% expected. Although consumer spending exceeded expectations, it was still lower than September’s growth of 2.3%.
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 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.
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.
Key economic activity data due on Wednesday for Japan, include Leading Indicators, which is a composite index based on 11 economic indicators.
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