Important Calendar Events
Thursday was Thanksgiving Day, which is a Bank Holiday in the US. There were no economic indicators scheduled to be released on Thursday and the dollar traded at a relatively low.
The dollar extended losses on Thursday, on reduced rate hike expectations, touching its lowest level since August. The dollar index remained below the 106 level most of the day, reaching as low as 105.6. As Thursday was a Bank Holiday, US Treasury yields remained the same, with the US 10-year bond yielding 3.7%.
The minutes of latest FOMC minutes were released on Wednesday and were more dovish than expected. The minutes revealed that many FOMC officials were in favor of slowing rate hikes soon. Many Fed officials are concerned about the negative impact of rate hikes on the economy. The dollar collapsed following the release of the FOMC meeting minutes, as future rate hike expectations were diminished.
Fed rhetoric is especially important this week as it may provide hints on the US central bank’s direction after recent soft inflation data. Fed rhetoric remained hawkish this week, although cautiously so, putting pressure on the dollar. The consensus between FOMC members seems to be that although inflation is cooling, further tightening will be required to bring inflation down consistently to the central bank’s 2% target.
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.
US CPI and PPI inflation data in October fell below expectations, indicating that inflation is cooling faster than expected. Annual CPI printed at 7.7%, compared to 8.2% in September and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes. Market expectations of future rate hikes were considerably trimmed after the inflation reports, causing the dollar to plummet. Slowing price pressures may induce the Fed to pivot towards a more dovish policy, reducing the aggressiveness of future rate hikes.
The US mid-term Congressional elections have put pressure on the dollar, but as markets began to digest the outcome of the elections, the dollar started to recover. The results of the elections were close, with the votes being tallied for a week. Republicans eventually wrested control of the House from the Democrats, winning the elections with a narrow majority. The Democratic party has lost control of the Senate and will find it hard to push its economic and political agenda in the future.
The 25th is Black Friday which, following Thanksgiving, is an unofficial holiday in the US. No economic indicators are scheduled to be released on Friday, and relatively low volatility is expected for the dollar.
The Euro edged higher on Thursday, benefitting from the dollar’s decline. EUR/USD touched 1.045, before paring some of the day’s gains. If the EUR/USD pair declines, it may find support at the parity level and further down near 0.973. If the currency pair goes up, it may encounter further resistance near 1.061.
German IFO Business Climate released on Thursday was more optimistic than expected. German IFO Business Climate for November climbed to 86.3 from 84.5 in October, versus 85.0 forecasted. This is an indication of an improving economic outlook for the Eurozone’s largest economy.
The Accounts of the latest ECB Monetary Policy were released on Thursday and were more hawkish than expected, boosting the Euro. ECB officials appear to be concerned that core inflation will not stabilize. The consensus among ECB members seemed to be that the central bank needs to prevent high inflation from becoming entrenched, regardless of a pessimistic economic outlook. A large number of ECB members appeared to be in favor of a 75-bp rate hike at the central bank’s next policy meeting.
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.
Final Eurozone headline inflation hit an all-time high of 10.6% in October, mainly due to the high cost of energy. Even though Eurozone inflation reached record highs in October and was much higher than September’s print of 9.9%, it was slightly lower than the preliminary estimate of 10.7%. Lower than-expected inflation caused the Euro to retreat on Thursday, as it eases a little the pressure on the ECB to raise interest rates.
Eurozone economic outlook is poor, showing signs that the EU is entering a recession, limiting the ECB’s ability to raise interest rates. As expected, Eurozone GDP grew by 0.2% in the third quarter of 2022. Economic expansion is slowing down, following a 0.7% GDP growth in the second quarter. Annual EU GDP growth was in line with expectations, printing at 2.1%. 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.
Economic activity indicators scheduled to be released on Friday for the Eurozone include Quarterly German Final GDP and German GfK Consumer Climate. These are key indicators for the EU’s leading economy and may affect the Euro.
The Sterling extended gains on Thursday, as the dollar retreated. GBP/USD reached the 1.215 level, before paring some of the day’s gains. If the GBP/USD rate goes up, it may encounter further resistance near 1.228, while support may be found near 1.133 and further down near 1.114.
UK CBI Industrial Order Expectations released on Thursday were higher than expected. CBI Industrial Order Expectations for November came at -5, against predictions of -9. A negative value indicates expectations of decreased lower volume. Even though November’s print was lower than October’s -4, it was more optimistic than forecasted, providing support for the Sterling.
MPC member Huw Pill delivered a hawkish speech on Thursday, boosting the Sterling. Pill stressed the need for further rate hikes, as inflationary pressures are becoming domestic. He also stated that his decisions will be based on developments in the labor market, as increased inflation usually leads to higher prices and higher wage demands.
The much-anticipated fiscal plan of the new government was released last week and brought volatility to the Sterling, even though the new financial statement contained few surprises. The fiscal statement was a complete reversal of the previous government’s controversial budget and aims to fill a 55-billion-pound hole in Britain's budget. Chancellor Jeremy Hunt will be cutting government spending in an attempt to restore public finances. Hunt also plans to freeze thresholds and allowances on income tax, national insurance, and pensions for a further two years.
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. Annual core CPI, which excludes food and energy, printed at 6.5%, exceeding expectations of 6.4%. 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.
At the 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 continued to gain strength on Thursday, with the USD/JPY pair touching a three-month low. USD/JPY tested the 138.4 level support, before climbing back to 138.6 later in the day. If the USD/JPY pair declines, it may find support at 138.4, while further support may be found at 130.4. If the pair climbs, it may find resistance at the psychological level of 145.0 and further up at 146.9.
Flash Manufacturing PMI data released on Thursday for Japan fell short of expectations, putting pressure on the Yen. Manufacturing PMI in November dropped to 49.4 from 50.7 in October, against expectations of expansion to 50.9. November’s PMI crossed the threshold of 50 which denotes a contraction in the sector, indicating that Japan’s economic outlook is worsening.
BOJ Core CPI data on Tuesday exceeded expectations, providing support for the Yen. 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 Core CPI data released last week also indicated that inflation in Japan continues to rise. 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 price pressures continue to rise in Japan.
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.
Japanese authorities recently staged interventions to support the Yen, as evidenced by the currency’s sudden surges after the USD/JPY moved above the psychological level of 150. However, the Japanese government cannot support the Yen indefinitely, as continuous interventions would not be sustainable.
The annual Tokyo Core CPI scheduled to be released on Friday may provide information on Japan’s inflationary outlook, in addition to Tuesday’s Annual BOJ Core CPI.
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