Important calendar events
The dollar soared on Monday, reaching another 20-year high, as the dollar index went to the 114 level, briefly touching 114.5 early in the day. US Treasury yields soared, with the US 10-year bond yielding touching 3.9%, its highest value since 2008.
Risk-off sentiment prevailed on Monday and US stocks tumbled, as recession fears grew. The safe-haven dollar thrived on increased risk aversion, resuming its ascend. The dollar had been propped up already by the hawkish outcome of last week’s Fed monetary policy meeting. The Fed’s stance has fuelled recession concerns boosting the haven dollar and pushing stock markets down.
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%.
In a hawkish statement after the Fed meeting, US policymakers 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. Federal Reserve Chair Jerome Powel has raised expectations of future rate hikes, stating that the Fed is determined to curb inflation even at the expense of economic growth.
Several indicators of economic activity are scheduled to be released on Tuesday for the US and may affect the dollar in the wake of last week’s policy meeting. More importantly, FOMC member Bullard and Fed Chair Powell are due to deliver speeches on Tuesday, which are expected to cause some volatility in the currency.
The Euro plummeted to multi-decade lows against the dollar on Monday, as the dollar gained strength. The EUR/USD pair continued trading below the strong parity level support and below the support at the 0.987 level, testing the support near 0.961. If the EUR/USD declines further it may find support near 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.
ECB President Christine Lagarde delivered another hawkish speech on Monday, pointing to further rate hikes and providing a little support for the Euro. Economic activity indicators released on Monday for the Eurozone were disappointing though, pushing the Euro down. The German Ifo Business Climate indicator was lower than last month’s, falling short of expectations. The German economy is showing signs of entering a recession and the country’s economic outlook is poor. In addition, the results of the Italian elections on Sunday are weighing down the Euro. Right-wing politician Giorgia Meloni won the elections, causing skepticism and anxiety in the Eurozone.
The Euro had already 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 and threatened western allies with nuclear action. A risk aversion sentiment prevailed, driving down riskier assets such as the Euro. Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. 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.
The Sterling collapsed early on Monday and the GBP/USD rate fell to an all-time low of 1.035. The Sterling pared some of its losses later in the day, as the BOE tried to reassure markets, but started to slide back down afterward. 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 hit an all-time low on Monday, as markets reacted to Friday’s mini-budget announcement. The British economy is still fragile and recession concerns are weighing the currency down. Recession fears give rise to a risk aversion sentiment, that has sent the dollar soaring on Monday, at the expense of the risk-sensitive Sterling. The pound had already taken a beating last week, after the BOE delivered a lower-than-expected rate hike, and tumbled on Monday. 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.
On Friday, 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 Sterling had already dropped to a 37-year low last week, following Putin’s threats and the Fed’s aggressively hawkish stance compared to the BOE’s more moderate policy.
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%.
MPC Member Pill is due to deliver a speech on Tuesday, which may affect the Sterling in light of recent developments.
The Yen resumed its descent on Monday, with the USD/JPY rate moving close to the 145 level resistance once again. 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.
BOJ Governor Haruhiko Kuroda made a speech in support of Japan’s recent bond-buying program. Kuroda defended the intervention, stating that it was appropriate. 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.
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.
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 statement following the policy meeting was neutral in tone, further weakening the currency. The BOJ kept the target for the 10-year bond yield at 0%. The BOJ keeps bond yields low, weakening the Yen. BOJ Governor Haruhiko Kuroda re-affirmed the BOJ’s commitment to maintaining economic stimulus, stating that the Bank would provide further easing if necessary and was prepared to maintain its dovish stance for a long time.
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 on Wednesday to curb soaring US inflation rates. While the Fed rate hike was in line with market expectations and had largely been priced in, the wide difference in interest rates is putting pressure on the Yen.
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