Important calendar events
The dollar edged higher on Thursday, after dropping earlier this week on increased risk sentiment. The dollar index climbed back above the 112 level as risk sentiment fell again. US Treasury yields also rose, with the US 10-year bond yielding above 3.8%.
ISM Services PMI data for September were released on Wednesday for the US, which are strong indicators of economic health. These exceeded expectations, reaching 56.7 this month against the 56.0 expected, but were still lower than August’s, which were at 56.9. ADP Non-Farm Employment Change data for September were also higher than expected, rising to 208K from 185K the previous month. Unemployment claims released on Thursday however were disappointing for the US economy, climbing to 219K, compared to the previous reading of 190K.
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, despite continued hawkish Fed rhetoric this week.
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.
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%.
Important employment indicators, such as Average Hourly Earnings, Non-Farm Employment Change, and Unemployment Rate are due on Friday and may affect the dollar.
The Euro retreated on Thursday, pushed down by a weak EU economic outlook. The EUR/USD pair was trading below the parity level on Thursday, dropping below 0.980. 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.
Spanish, Italian, French, and German Services PMI, as well as EU Final Services PMI data for September were released on Wednesday. Overall, the data were disappointing, showing a decline from August’s readings. German factory orders for August were released on Thursday and they fell considerably below expectations, showing a decline of 2.4%, compared to a rise of 1.9$ the previous month. The EU economic outlook remains poor, putting pressure on the currency.
The ECB Monetary Policy Meeting Accounts were released on Thursday, reinforcing expectations of a large rate hike at future meetings. EU policymakers expressed concern for “self-reinforcing” inflation, as fiscal packages and a declining Euro increase price pressures. Meanwhile, Germany is pursuing a 200bn Euro borrowing package to help its economy against the energy crisis, raising concerns in other EU countries.
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.
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.
Key indicators for some of the EU’s leading economies are scheduled to be released on Friday and may affect the Euro.
The Sterling declined on Thursday, pushed down from a stronger dollar, and GBP/USD fell below the 1.114 level, testing the resistance near 1.146. If the GBP/USD rate goes up, it may encounter resistance near 1.146 and higher up at 1.173, while support may be found at the new all-time low of 1.035.
UK Final Services PMI data for September released on Wednesday exceeded expectations, reaching 50.0, compared to 49.2 the previous month. Construction PMI data on Thursday were also higher than expected, climbing to 52.3 in September from 49.2 in August.
The announcement of the new government’s first ‘mini-budget’ drove the pound to an all-time low last week. 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. 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%.
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 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 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.
The Yen resumed its decline on Thursday, as the dollar gained strength, with the USD/JPY pair moving precariously close to the 145 level. The USD/JPY pair is currently trading just below the 145 key level, testing the resistance at this level. 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 higher up at the 1998 high of 147.7.
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.
On The other hand, the BOJ is unlikely to reverse its dovish policy to aid the struggling Yen. On Thursday, Bank of Japan Governor Haruhiko Kuroda stressed that recent cost-push inflation must be accompanied by higher wage growth for the central bank to consider tweaking its ultra-easy policy
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.
Several key economic indicators are scheduled to be released on Friday for Japan, especially the Average Cash Earnings and Leading Indicators data.
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