Important calendar events
The dollar retreated on Thursday with the dollar index falling from 113.7 early in the day to almost 112. US Treasury yields also declined, with the US 10-year bond yield dropping from above 3.8%, after reaching 15-year highs earlier in the week.
The dollar, which had been trading in overbought territory, retreated on Thursday, despite robust US economic data and hawkish Fed rhetoric. On Thursday, Fed’s Bullard defended the central bank’s hawkish stance, stating that the US job market is healthy and can withstand further economic tightening. He added that markets are expecting further rate hikes and that the US economy is unlikely to be affected significantly by the recent turmoil in UK markets. Earlier on Thursday, US GDP data released were in line with expectations, while unemployment claims were lower than expected, dropping to 193K from 209K the previous month.
Hawkish Fed rhetoric had propelled the dollar to fresh 20-year highs earlier this week, as markets are anticipating further rate hikes. FOMC member James Bullard delivered a hawkish speech on Tuesday, emphasizing the risks of increased inflation and minimizing recession concerns, stating that recession fears should be more global than the U.S. FOMC member Loretta Mester also delivered a hawkish speech, stating emphasizing that further rate hikes are needed to bring rampant inflation under control. Federal Reserve Chair Jerome Powel has also raised expectations of future rate hikes, stating that the Fed is determined to curb inflation even at the expense of economic growth.
The US Federal Reserve voted to raise its interest rate by 75 basis points last week 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%.
US policymakers have downgraded their GDP estimates while revising upwards the inflation outlook. Inflation in the US is not cooling at the expected rate, putting pressure on the Fed to maintain its hawkish stance. CPI increased by 0.1% in August and Annual CPI through August increased by 8.3%, prompting the Fed to continue tightening its monetary policy.
Several important economic activity indicators are scheduled to be released on Friday for the US and may affect the dollar. Core PCE Price Index, Revised UoM Consumer Sentiment, and Revised UoM Inflation Expectations, in particular, may influence future fiscal policy. In addition, FOMC members Mester and Williams are due to deliver speeches on Friday, which may cause some volatility in the currency.
The Euro declined in early trading on Thursday but gained strength later in the day as the dollar retreated and the EUR/USD pair climbed from 0.963 to 0.980. If the EUR/USD declines further 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 1.019 and further up at 1.036.
On Thursday, German CPI data showed that inflation in Germany rose unexpectedly, touching double digits and boosting the Euro. German CPI rose by 1.9% in September, compared to only 0.3% in August, reaching 10% on an annual basis.
On Thursday, ECB vice president Luis de Guindos reiterated that inflation in the Euro Zone remains very high and stated that the central bank will do whatever it takes to lower inflation. On Wednesday, ECB President Christine Lagarde delivered a decisively hawkish speech, stating firmly that the ECB will continue raising interest rates at the EU Central Bank’s next few meetings. Other ECB members also maintained a hawkish tone, not discounting the possibility of a 75-bp rate hike at the Bank’s next meeting in October.
The Euro retreated last week after a hawkish Fed policy meeting and statement boosted the dollar. The US Federal Reserve 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.
Last week, Russian President Vladimir Putin renewed threats to halt energy exports. Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. This week, the EU’s energy crisis intensified, as leaks in three major Russian gas pipelines raised suspicions of sabotage. High energy costs in the Eurozone are driving the Euro down, while inflationary pressures mount.
Eurozone inflation hit a record high of 9.1% in August on an annual basis, as price pressures increased despite the fall in global fuel prices. 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.
CPI Flash Estimate and Core CPI Flash Estimate data are scheduled to be released on Friday for the Eurozone. These are key inflation indicators and are likely to cause some volatility in euro prices as they may influence the aggressiveness of the ECB’s monetary policy in the future.
The Sterling exhibited high volatility on Wednesday, plummeting early in the day after the BOE announced a bond-buying program, but rallying strongly later in the day, benefitting from the dollar’s decline. The GBP/USD rate sank to the 1.054 level on Wednesday morning but then climbed back to 1.090. If the GBP/USD rate goes up, it may encounter resistance near the 1.146 level and higher up near 1.173, while support may be found at the new all-time low of 1.035.
The Sterling fell in early trading on Thursday, after British Prime Minister Liz Truss defended economic plans and heavy tax cuts, which have been criticized heavily in the past few days. The pound gained strength later in the day, as the dollar’s decline benefitted competing currencies.
Last week, the new 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 includes major tax cuts, which the British government will fund through borrowing at a time when the country is facing a debt crisis. On Monday, the Sterling collapsed nearing parity with the dollar, as markets pondered the implications for the economy of the new government’s first ‘mini-budget’.
The BOE announced a new bond-buying program on Wednesday, with the object to restore order to markets. The BOE aims to stem the sell-off in the UK gilt market by buying long-dated gilts, which have been strongly affected by repricing. The Sterling dropped after the BOE’s announcement but recovered later in the day after the dollar fell.
The Sterling hit an all-time low on Monday, as recession concerns are weighing the currency down. The pound had already taken a beating last week after the BOE delivered a lower-than-expected rate hike. BOE Governor Andrew Bailey stepped in on Monday to provide some support for the currency by announcing that the BOE would not hesitate to change interest rates if needed. The announcement propped up the Sterling briefly and raised expectations of an emergency rate hike. As, however, it became clear that there would be no emergency intervention, the pound started to retreat towards the new all-time low again.
The Bank of England raised its interest rate by 50 bps last week, bringing the total interest rate to 2.25%. Markets were expecting a steeper rate hike, with odds favoring a 75-bp raise. 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 last week.
UK economic outlook remains poor, with high inflation and rising recession concerns, although annual inflation in August dropped to 9.9% from 10.1% in July. 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%.
Several economic indicators are scheduled to be released on Friday for the UK, including the Current Account and Final quarterly GDP. Economic data at times of great market turbulence may cause fluctuations in the Sterling price, as the country’s economic outlook may influence the new British government’s financial policy.
The Yen traded sideways against the dollar on Thursday with the USD/JPY rate remaining close to the 144.5 level. The Yen’s weakness had prompted an intervention last week, as the currency pair had threatened to cross the 145 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 at the 145 level and higher up at the 1998 high of 147.7.
The BOJ Monetary Policy Meeting Minutes were released on Wednesday and provided a little support for the currency. The meeting minutes indicated that BOJ members were concerned about Japan’s rising inflation and the weakening yen. It is clear, however, that the BOJ does not intend to change its monetary policy to support the ailing currency.
Instead, the Japanese government intervened to stem the Yen's weakness last week after it became clear that the BOJ would not move to support the currency. The Japanese Ministry of Finance intervened in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. Japan's Vice Finance Minister for international affairs Masato Kanda stated that the government has taken decisive action to support the Yen, which had crossed the 145-mark with the dollar. The sudden move propelled the Yen upwards. This week though, the Yen retreated again, as the intervention provided only a temporary boost and further interventions seem unlikely.
BOJ Governor Haruhiko Kuroda made a speech in support of Japan’s recent bond-buying program on Monday, defending the intervention. Markets, however, seemed unfazed by Kuroda’s support, especially as the BOJ does not seem to have any intention to act in support of the Yen, and the currency continued to slide.
In its monetary policy meeting last week, 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 BOJ also kept the target for the 10-year bond yield at 0%. The BOJ keeps bond yields low, weakening the Yen.
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, including Unemployment Rate, Preliminary Industrial Production, Retail Sales, Consumer Confidence, and Housing Starts. These will provide important information on the state of the Japanese economy and may affect the currency given the Yen’s current fragile state.
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