Important calendar events
The dollar rallied on Monday with the dollar index climbing above 111.5. US Treasury yields also edged higher, with the US 10-year bond yield rising from 4.00% to 4.05%.
A Fed black-out period started a week ago, preventing further comments until the central bank’s next policy meeting on Wednesday. The dollar became more vulnerable without the fortifying effect of hawkish Fed speeches and lost ground on market uncertainty over the Fed’s future direction.
The dollar was on the rebound on Monday, after plummeting last week. As the much-anticipated Fed meeting is drawing near, market confidence in the dollar increases on renewed rate hike expectations.
High-risk aversion sentiment has been prevalent throughout the year and is increasing the safe-haven dollar’s appeal. At the same time, the Fed’s increase in interest rates is attracting investors who seek higher returns, boosting the dollar.
US inflation rose by 0.4% every month in September, reaching 8.2% on an annual basis, dropping only slightly from last month’s 8.3%. Price pressures continue to increase in the US, putting extra strain on the Federal Reserve to continue with its policy of monetary tightening. Inflation rates have proved to be resistant to economic tightening and continue to rise.
This week, all eyes are going to be on the Fed monetary policy meeting on Wednesday, November 2nd. The US Central Bank has so far increased interest rates by a total of 300 basis points this year, bringing its benchmark interest rate to 3.25%. Another rate hike of at least 75 bps is expected at Wednesday’s meeting and has already been largely priced in by markets.
Of equal importance to the interest rate announcement are the FOMC Statement and Press Conference following the monetary policy meeting. Market participants will focus on these in an attempt to gauge the central bank’s future policy direction. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.
Final Manufacturing PMI, ISM Manufacturing PMI, and JOLTS Job Openings are scheduled to be released on Tuesday, a day before the much-anticipated Fed meeting. In the absence of Fed speech, economic activity data may affect the dollar considerably.
The Euro declined on Monday on record-high Eurozone inflation data and a stronger dollar. The Euro continued trading below parity with the dollar, dropping near 0.987. If the EUR/USD pair declines, it may find support near the 0.963 level and further down at the 0.953 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at the parity level and higher up near 1.009.
The Euro has been on the decline since last week’s ECB monetary policy meeting. The ECB raised its interest rate by 75 basis points to 1.5% last week, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Markets had already priced in a 75-bp rate hike, however, and the increase in interest rates failed to provide support for the Euro. In addition, the US Fed has a much-larger interest rate of 3.25%, which is expected to reach 4.0% or higher after the US central bank’s policy meeting this week.
The ECB monetary policy statement and press conference following the announcement of the main refinancing rate had bearish undertones, further weakening the Euro. ECB President Christine Lagarde’s speech lacked a forward bias, stating that future rate hikes will be considered on a ‘meeting by meeting’ basis.
Record-high Eurozone inflation data failed to provide support for the Euro in the wake of the ECB policy meeting. CPI Flash and Core CPI Flash data on Monday far exceeded expectations. Eurozone inflation in October reached 10.7% versus September’s CPI of 9.9%. Price pressures continue to increase in the EU, driven primarily by energy prices. Core CPI, which excludes food and energy, was also up though, reaching 5.0% in October against expectations that it would remain at last month’s level of 4.8%. The ECB will need to continue its aggressive monetary tightening to tame soaring inflation rates.
Eurozone economic outlook however is poor, with analysts predicting stagnation later this year and in the first quarter of 2023, limiting the ECB’s ability to raise interest rates. Even though further rate hikes seem certain, the magnitude of the hikes may decrease if the EU economy cannot withstand aggressive tightening.
Preliminary Flash GDP data released on Monday seem to support this scenario. Flash GDP for the third quarter of 2022 shows economic growth of only 0.2% against an expansion of 0.8% in the previous quarter. Stagflation becomes a real headache for the ECB, which will be forced to battle inflation without the support of a robust economic background.
The Sterling plummeted on Monday as the dollar rallied and GBP/USD dropped to 1.147. If the GBP/USD rate goes up, it may encounter resistance near 1.149 and higher up at 1.164, while support may be found near 1.125 and further down at the new all-time low of 1.035.
With both the Fed and the BOE monetary policy meetings drawing near, market expectations incline more towards a sharp Fed rate hike, boosting the dollar. The Sterling on the other hand is slipping after a protracted period of political instability. Political instability has been playing a major part in the currency’s decline over the past few weeks, driving the pound to an all-time low.
PM Sunak vowed last week that economic stability will be at the heart of his administration’s agenda eliciting a positive reaction from markets. Foreign minister James Cleverly has indicated that the much-anticipated new fiscal plan, which had been scheduled for October 31, may be delayed as the government would need more time to draft a solid budget. Repairing the country’s finances is bound to be a difficult task for the new government. The new fiscal statement is expected on November 17th and is reported to be a complete reversal of the previous government’s controversial budget. Instead of tax cuts, the current government is likely to go with tax hikes, which will be a tough sell on the British public.
The BOE has also announced a new round of bond buying. The British central bank will hold 8 bond sales Between November 1st and the end of the year, which will be evenly distributed across the short and medium-maturity sectors only in the 4th quarter of 2022.
This week, the much-anticipated BOE policy meeting is scheduled for Thursday, November 3rd. Coming a day after the Fed monetary policy meeting, the BOE meeting is likely to generate high volatility for the Sterling and the combined events may provide direction for GBP/USD.
The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. Annual inflation returned to 40-year highs in September, climbing to 10.1%, after cooling to 9.9% in August. Rising UK inflation is forcing the BOE to make some tough choices. 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 adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy.
Markets are expecting a shift towards a more aggressively hawkish policy after September’s inflation report, with odds in favor of a 75-bps increase. A 75-bps rate hike has already been priced in and will likely not affect Sterling's price significantly. Market participants will follow the Monetary Policy Summary and BOE Governor Andrew Bailey’s speech closely, for hints into the central bank’s future policy direction.
The Yen resumed its decline on Monday as the dollar rallied. USD/JPY crossed the resistance near 147.7, climbing above 148.7. If the USD/JPY pair falls, support might be found near 145 and further down at 143.5. If the pair climbs, it may find resistance further up at the psychological level of 150 and higher still at the 1990 high near 160.
Economic data for Japan released on Monday were overall mixed, failing to provide support for the currency. Retail sales in Japan for September showed a 1.1% increase against the 0.8% expected, with annual retail sales increasing by 4.5% versus the 4.1% forecasted. Preliminary industrial production for September showed a decline of 1.6% against the 0.8% expected, indicating increased contraction in this sector.
Japanese authorities likely staged interventions over the past week to support the collapsing Yen, as evidenced by the currency’s sudden surges. The USD/JPY Yen had moved well above the psychological level of 150 the week before, but plummeted suddenly in what was undoubtedly large-scale selling of dollars and buying Yen. The suspected interventions failed to stem the tide, however, and the Yen continued to retreat. The Japanese government cannot support the Yen indefinitely, as continuous interventions would not be sustainable.
The BOJ policy meeting last week held few surprises, as 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 puts the Yen at a disadvantage, driving its price down. BOJ Governor Haruhiko Kuroda remained firm in his dovish stance though, even as the weakening Yen caused anxiety among government officials.
The BoJ revised core CPI projections for 2022 to 2.9% from 2.3% previously, as recent inflation data in Japan exceeded expectations. The central bank also kept its 10-year Japanese Government Bond yield target at plus or minus 25 basis points around 0.00%. With the corresponding US bonds yielding above 4.0%, the difference in bond yields is putting pressure on the Yen.
Japan’s Prime Minister Fumio Kishida announced last week an extra 29.1 Trillion Yen in budget stimulus measures that include steps to curb electricity bills, which could tame inflation.
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.
as a Liquidity Provider
and reliable execution
The website you are now viewing is operated by TopFX Global Ltd, 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 you understand and accept the risks associated with trading with a non-EU entity (as these risks are described in the Own Initiative Acknowledgment Form and that your decision will be at your own exclusive initiative and that no solicitation has been made by TopFX Global Ltd or any other entity within the Group.
Don't show this message again
These cookies fall under the following categories: essential, functional and marketing cookies. Marketing cookies may also include third-party cookies.