Important calendar events
The dollar continued climbing to new 20-year highs on Thursday, with the dollar index rising above the 107.2 level. Global recession concerns are propping up the safe-haven dollar, while competing assets, such as the Euro and the Sterling, are pushed down. US Bond yields also rallied on Thursday, with the US 10-year treasury note yielding approximately 3.0%.
US Employment and Trade Balance data were released on Thursday and were mostly neutral, having a limited effect on the dollar. In addition, FOMC members Bullard and Waller delivered speeches on Thursday, which were overall hawkish, supporting the dollar.
The global economic outlook is poor, with a recession threatening many countries. Rampant inflation, combined with tightening monetary policy creates a toxic economic mix. Recession fears and geopolitical risks increase risk aversion sentiment, boosting the safe-haven dollar.
Concerns about the US economic downturn spurred by weak US economic data, however, are putting a lid on the dollar’s ascend. Deteriorating economic health in the US is raising recession concerns however and limits the US Federal Reserve’s ability to tighten its fiscal policy. The dollar has been supported by hawkish Fed policy but the precarious state of the US economy is putting pressure on the currency.
In its latest policy meeting, the US Federal Reserve voted to raise its benchmark interest rate by 75 points, taking aggressive action against inflation. High US inflation rates are forcing the Fed to tighten its monetary policy. PPI in June climbed 0.8% for the month and 10.8% on an annual basis, driven by rising costs of food and energy.
US Employment data are scheduled to be released on Friday and may cause some volatility in dollar price. In addition, FOMC member Williams is due to deliver a speech, which may influence the dollar.
The Euro hit a fresh two-decade low against the dollar on Thursday, with the EUR/USD rate reaching 1.015 for the first time in 20 years. The Euro has been pushed down this week by disappointing EU economic data and a rising dollar. If the currency pair goes up, it may encounter resistance at 1.078. If the EUR/USD continues to fall, it may find support near the 20-year low of 0.985.
The Euro has been under pressure by increased fears of a potential energy crisis in the Eurozone. EU members have recently announced a gradual ban on Russian oil imports, while Russia has retaliated by limiting its natural gas exports to certain EU countries. This week, a strike of Norwegian oil and gas workers has intensified concerns of an energy crisis in the EU.
Indications that the Eurozone economy is slowing down are raising fears of a recession in the EU and putting pressure on the currency. Stagnating the Eurozone economy increases the odds that the ECB may be forced to moderate its plans for raising interest rates to combat high inflation. In contrast, the Fed’s steep rate hikes in the past few months, emphasize the gap between ECB and Fed policies, putting pressure on the Euro. Eurozone inflation in June has reached a record high of 8.6%, an increase from 8.1% in May, driven primarily by rising food and energy costs.
The Euro has been supported these past few weeks by expectations of an ECB shift to a more hawkish direction. As the ECB announced the end of the quantitate easing program in July however, worries about high debt levels in some Eurozone countries were revived. The ECB is struggling to deal with financial fragmentation in the EU caused by the wide range of lending rates across Eurozone states, limiting the ECB’s monetary tightening options.
Several economic indicators are scheduled to be released on Friday for the Eurozone and may affect the Euro, especially EU Economic Forecasts. In addition, ECB ECB President Christine Lagarde is due to deliver a speech on Friday at the ECB Economic Meetings in France and her speech may cause volatility in the Euro price.
The Sterling edged higher on Thursday, even as UK PM Boris Johnson announced his resignation. The GBP/USD rate traded above the 1.200 level after Boris’ resignation. If the GBP/USD rate goes up, it may encounter resistance near the 1.240 level, while if it declines, support may be found near 1.140.
The British PM, Boris Johnson, had been struggling to keep his seat for some time, pushing the Sterling down. On Tuesday, UK Chancellor of the Exchequer Rishi Sunak and Health Secretary Sajid Javid announced their resignations from Boris Johnson’s government. This was the last straw for Boris’ ailing administration, finally forcing the British PM to announce his resignation on Thursday. Johnson will continue to serve until a new leader is in place. Markets reacted favorably to Johnson’s resignation, as the climate of political uncertainty in the UK had been reducing investor confidence in the currency. Johnson’s resignation was considered to be a matter of time and had already been largely priced in by markets.
Deteriorating economic health in the UK however, is keeping the currency down, while global recession fears are putting pressure on the risk-sensitive Sterling. Soaring inflation rates add more pressure on the BOE to continue increasing its interest rates. UK inflation has risen to 40-year highs in June touching 9.1% on an annual basis, driven primarily by the high cost of energy imports, putting pressure on UK households.
Britain’s uncertain economic outlook, however, limits the BOE’s ability to shift towards a more aggressively hawkish policy. Stagflation is a risk for the UK economy, as for many other countries, as economic stagnation coupled with rising inflation creates a toxic mix for the economy. The BOE is adopting a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. With the Fed moving at an aggressively hawkish pace, the divergence in monetary policy between the Fed and the BOE is highlighted, putting pressure on the Sterling.
The Yen traded sideways against the dollar on Thursday, with the USD/JPY pair moving along the 136 level. If the USD/JPY declines, support might be found near the 134.2 level and further down at 131.7. If the pair climbs it may find resistance at the 136.7 level and further up at the 1998 high of 147.7.
This week, rising global recession fears have sparked a risk-aversion sentiment, boosting safe-haven assets. The dollar’s impressive rally, however, is weighing down competing currencies, such as the Yen, down.
Leading indicators for the state of the economy in Japan were released on Thursday and fell within expectations, but were lower than last month’s indicating that economic growth in Japan is slowing down.
Japan’s 30-year bond yielded 1.23 at Thursday’s bond auction, while Japan’s 10-year bond yielded 0.25 at Tuesday’s bond auction. The BOJ continues to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. In contrast, the respective US 10-year bond is offered with a yield of over 3%, more than an order of magnitude higher than the Japanese bond. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
The BOJ has kept its benchmark interest rate unchanged, despite the rising inflation rates in Japan. While other countries are moving towards quantitative tightening, Japan continues to pour money into the economy and maintains its negative interest rate. The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down.
Inflation in Japan remained above the BOJ’s 2% target in June, reaching 2.1% on an annual basis. The combination of a weak currency and rising inflation is burdening Japanese households.
Several important economic indicators are scheduled to be released on Friday for Japan. These include Household Spending, Bank Lending, Current Account, and Economy Watchers Sentiment and may cause some volatility in the price of the Yen.
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