Important calendar events
The dollar retreated on Monday, as the dollar index fell below the 112 level. US Treasury yields also fell heavily on Monday, with the US 10-year bond yield dropping below 0.365%, after reaching 15-year highs of 4.0% last week.
The dollar resumed its decline on Monday, as weak US economic data put pressure on the currency. The ISM Manufacturing PMI Index, which is a leading indicator of economic health, fell short of expectations, dropping to 50.9, compared to 52.5 expected and 52.8 the previous month. Construction spending in August fell by 0.7%, against a 0.6% drop in July and only a 0.1% drop predicted.
Hawkish Fed rhetoric propelled the dollar to fresh 20-year highs early last week on expectations of steep rate hikes. The dollar, which had been trading in overbought territory though, retreated at the end of the week, despite robust US economic data, rampant inflation, and hawkish Fed rhetoric. On Friday, Core PCE Price Index, the Fed’s favorite inflation gauge, increased 0.6% month-on-month, compared to a forecast of 0.5%, with the annual reading climbing to 4.9%. Inflation in the US remains high, putting pressure on the Fed to maintain its hawkish stance. Odds of another steep rate hike at the Fed’s next policy meeting in November increased, providing support for the dollar.
The US Federal Reserve has recently voted to raise its interest rate by 75 basis points 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%.
Several economic activity indicators are scheduled to be released on Tuesday for the US, such as JOLTS Job Openings and Factory Orders, and may cause some volatility in dollar prices.
The Euro traded sideways against the dollar on Monday, with the EUR/USD pair fluctuating around the 0.980 level. If the EUR/USD pair 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 1.005 and further up at 1.019.
The Euro gained support from the dollar’s decline on Monday. Weak EU economic data, however, are driving the currency down. On Monday, Final Manufacturing PMI data were released for some of the Eurozone’s leading economies and the EU as a whole. These were mostly in line with expectations and were overall disappointing especially Germany’s data, as the EU economic outlook does not seem to be improving. Eurozone inflation is rampant, forcing the ECB to continue raising interest rates. Continued rate hikes, however, increase concerns that the EU economy will be tipped into a recession.
EU CPI and Core CPI data released last week showed that Eurozone inflation is on the rise, intensifying the EU’s economic crisis. Eurozone inflation reached double digits in September, climbing to 10% on an annual basis, compared to 9.1% in August, beating estimates of 9.7%. Inflation in the EU is expected to rise even further in the following months driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation.
Soaring EU inflation rates and hawkish ECB rhetoric increase the odds of a 75-bp rate hike at the Bank’s next meeting in October. The Euro has been pushed down by the gap in interest rates with the US. The US Federal Reserve recently 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. Soaring inflation rates in the EU increase the chances of another 75-bp rate hike in October, boosting the Euro.
Economic activity indicators released last week for the Eurozone were overall disappointing though, pushing the Euro down. In addition, Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. EU’s energy crisis intensified last week, as there were leaks in three major Russian gas pipelines, raising suspicions of sabotage. High energy costs in the Eurozone are driving the Euro down, while inflationary pressures mount.
ECOFIN meetings will be held on Tuesday, and their outcome may affect the Euro. In addition, ECB President Christine Lagarde is due to deliver a speech on Tuesday, which may cause volatility in the Euro price.
The Sterling edged higher on Monday, benefitting from the dollar’s decline as well as from news on the new Government’s budget. The GBP/USD rose above the 1.132 level. 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 collapsed nearing parity with the dollar early last week, as markets pondered the implications for the economy of the new government’s first ‘mini-budget’. The new British Chancellor, Kwasi Kwarteng, has recently 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.
British Prime Minister Liz Truss defended the budget last week, with the new Government receiving heavy criticism for some parts of the plan. On Monday however, the British Government made a U-turn, scraping some of the most controversial parts of the mini-budget. The heavy tax cuts originally planned, would primarily benefit the highest earners in a time of heightened economic pressure on British households. The announcement of the decision to reverse the tax cuts on Monday brought some relief to the ailing pound.
The BOE had to resort to a new bond-buying program last week, to restore order to markets. The BOE aimed 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 last week, as recession concerns are weighing the currency down. The pound had already taken a beating after the BOE delivered a lower-than-expected rate hike. 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 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.
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%.
The Yen was volatile on Monday, with the USD/JPY crossing the 145 level early in the day, dropping sharply to 144, and then inching back up to the 145 level later in the day. 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 145 level seems to be acting as a landmark by the Japanese government, which rushes to intervene when the currency pair crosses this level. The Japanese government recently intervened to stem the Yen's weakness after the currency pair threatened to cross that level. The Japanese Ministry of Finance intervened in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. On Monday, Japanese Finance Minister Shunichi Suzuki stated that Japan is ready to take action to stabilize the exchange rate. The news propped up the Yen which had crossed the 145 level against the dollar early on Monday.
Economic activity indicators released on Monday for Japan were mixed. The Tankan Manufacturing Index, which is a leading indicator of economic health, fell short of expectations, but the Tankan non-Manufacturing Index, which measures activity in other sectors, exceeded expectations. Final Manufacturing PMI data in September dropped slightly to 50.8 from 51.0 in August.
In its latest monetary policy meeting, 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. 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 Tuesday for Japan, and primarily the Tokyo Core CPI. These will provide important information on the state of the Japanese economy and may affect the currency given the Yen’s current fragile state. Market participants will also keep an eye on announcements from the Japanese government about further interventions on the Yen.
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