Important calendar events
The dollar remained strong on Wednesday and the dollar index hovered around 108.8, after reaching 109 earlier in the week. The US 10-year treasury note climbed above 3.1%, boosted by increased Fed rate hike expectations.
Fed rhetoric remains firmly hawkish this week, indicating that the Fed is committed to increase interest rates until inflation has been brought under control. On Wednesday, FOMC member Loretta Mester stated that she sees the Fed benchmark interest rate rising to 4% and no rate cuts through 2023. Her speech increased expectations of a steep rate hike in September, propping up the dollar. Markets are pricing in a significant Fed rate hike for September, as market odds are leaning towards a 75-bp rate hike.
US Economic activity data released on Wednesday were mixed, with ADP Non-Farm Employment Change falling short of expectations, indicating that employment levels are not growing as anticipated.
US inflation remains at a multi-decade high of 9.1%, but its ascend seems to have been arrested for the time being, mainly due to a slowdown in energy costs. Cooling inflation shows that the Federal Reserve’s aggressively monetary tightening yields results and removes some of the pressure on the Fed to increase interest rates.
Fed Chair Jerome Powell stated at the Jackson Hole symposium last week that, while recent inflation data offer hope that inflation may have peaked, this improvement is not enough to affect the Fed’s policy. Powell’s speech was aggressively hawkish, pointing out that inflation remains at 40-year highs and is a long way from the US Central Bank’s target of 2%.
The Fed is tasked with battling soaring inflation without the benefit of a strong economic background. US economic data in the next few weeks are expected to affect the Fed’s interest rate decision. A robust economic outlook is required to enable the Fed to tighten its monetary policy further.
Several indicators of financial health and employment are due to be released on Thursday, such as US Unemployment claims. ISM Manufacturing is also a leading indicator of economic health and may cause some volatility for the dollar.
The Euro climbed sharply on Wednesday, boosted by unexpectedly high Eurozone inflation data. EUR/USD climbed above the 1.000 parity level to 1.006. EUR/USD is expected to continue testing the parity support level during the week. If the currency pair goes up, it may encounter resistance at 1.019 and further up at 1.036. The parity level is strong psychological support, which is not easy to overcome.
EU Economic activity indicators, such as German Import Prices and French Consumer Spending, fell below expectations on Wednesday. EU CPI and Core CPI for the Eurozone, however, exceeded expectations, boosting the currency. Eurozone headline CPI jumped to 9.1% on an annual basis in August, the highest on record, while Core CPI rose to 4.3% from 4.1% last month.
Inflation in the EU is expected to rise even further in the following months, possibly reaching double digits, driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation. Rising Eurozone inflation is expected to figure largely in determining the future ECB monetary policy.
Reports of a steep rate hike of 75 bps in September are boosting the Euro. Last week, ECB members’ speeches at the Jackson Hole Symposium were more hawkish than anticipated, fuelling expectations of a shift towards a tighter monetary policy.
In its latest policy meeting, the ECB raised its interest rate by 50 base points, bringing its benchmark interest rate from -0.50% to 0%. The ECB’s interest rate remains low, especially compared to the Fed’s 2.50% interest rate. However, the EU's economic outlook remains poor, limiting the ECB’s ability to raise interest rates.
Several economic activity indicators are scheduled to be released on Thursday for the Eurozone, including Spanish, Italian, French, and German Manufacturing PMI, EU Manufacturing PMI, and Spanish and French 10-y Bond Auction.
The British Pound fell against the dollar on Wednesday. GBP/USD plummeted, falling to the 1.160 level. If the GBP/USD rate goes up, it may encounter resistance near the 1.190 level, while if it declines, support may be found near 1.140. The dollar has been propped up by rising expectations of a steep rate hike in September, driving competing currencies down.
The latest UK GDP data have shown that the British economy is contracting, confirming the BOE’s forecast of reduced economic growth. 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%. Predictably, UK consumer confidence last week remained at historic lows.
Britain’s grim economic outlook is preventing a more hawkish fiscal policy and is hampering the BOE’s attempts to bring inflation down. UK inflation reached double digits in July, with CPI climbing to 10.1% on an annual basis. Soaring energy and food prices put pressure on British households.
In its latest monetary policy meeting, the Bank of England decided to raise its interest rate by 50 base points, bringing the total interest rate up to 1.75%. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. Soaring inflation rates in the UK however, are forcing the BOE to take more decisive action. Markets are pricing in three rate hikes of at least 50 bp each, at the remaining BOE policy meetings in September, November, and December.
Political instability after British PM Boris Johnson’s resignation is also keeping the Sterling down, as the Tory Leadership race continues. Political developments are likely to influence the currency, as members of the Conservative Party are due to select a new British prime minister on September 5th.
The Yen was mostly stable against the dollar on Wednesday. The USD/JPY pair traded sideways, fluctuating around the 138.6 level, after peaking earlier in the week and hitting 139. If the USD/JPY declines support might be found at 134.2. If the pair climbs it may find resistance near 139.4 and further up at the 1998 high of 147.7.
Risk sentiment has soured on increased Fed rate hike expectations in the past couple of weeks. US Fed officials are displaying an aggressively hawkish stance. Increased odds of a steep rate hike in September are propping up the dollar and pushing competing currencies, such as the Yen, down.
Several economic activity indicators were released on Wednesday for Japan and were overall higher than expected, providing support for the Yen. Retail sales went up to 2.4% from 1.5% last month, while Consumer Confidence increased to 32.05 from 30.2 last month, indicating that Japan’s economic outlook is positive.
Inflationary pressures are increasing in Japan, mainly due to the high cost of imported energy. The combination of a weak currency, low wages, and rising inflation is burdening Japanese households.
The recent drop in fuel prices, however, is providing some support for the Yen. Japan is a net energy importer and the reduction in energy costs is providing some relief to the economy.
The BOJ maintains 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.
Several minor economic indicators are scheduled to be released on Thursday for Japan, such as Capital Spending, Final Manufacturing PMI, and 10-y Bond Auction, and may cause some volatility for the Yen.
The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.
The website you are now viewing is operated by TopFX, a trade name of Fondex Limited, an entity which is regulated by the Financial Services Authority (FSA) of Seychelles with a Securities Dealer License No SD037 that is not established in the European Union or regulated by an EU National Competent Authority.
If you wish to proceed, please confirm that your decision will be at your own exclusive initiative and that no solicitation has been made by TopFX or any other entity within the Group.
These cookies fall under the following categories: essential, functional and marketing cookies. Marketing cookies may also include third-party cookies.