Important calendar events
The dollar slipped on Monday, with the dollar index dropping to 112. US Treasury yields remained strong, with the US 10-year bond yielding approximately 4.0%.
The US Empire State Manufacturing Index released on Monday was particularly disappointing for the state of the US economy, putting pressure on the dollar. The index reached -9.1, against the previous month’s reading of -1.5 and predictions of -4.5. A negative value shows declining economic health conditions.
Fed rhetoric remains firmly hawkish, with FOMC policymakers Esther George and Mary Daly commenting over the weekend that the US Central Bank may need to step up its rate hikes to combat soaring inflation.
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%. Even though annual inflation decreased, it exceeded expectations that it would drop to 8.1% in September. Core CPI, which excludes food and energy, rose by 0.6% in September exceeding forecasts.
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. In addition, September’s data represent a period with lower fuel prices than previous months, which should have led to lower inflation rates.
So far, US inflation does not show signs of cooling at the expected rate, despite the Fed’s efforts. Sharp rate hikes and continuous fiscal tightening run the risk of tipping some of the world’s leading economies into recession.
The US Federal Reserve 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 minor economic activity indicators are scheduled to be released on Tuesday for the US, but these are not expected to have a considerable impact on the dollar.
The Euro gained strength against the dollar on Monday, with the EUR/USD pair climbing to the 0.985 level. If the EUR/USD pair declines, it may find support near the 0.953 level and further down at the 0.845 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at the parity level and further up at 1.019.
Risk-on sentiment prevailed in markets on Monday, benefitting riskier currencies, such as the Euro, at the expense of the safe-haven dollar. The Euro also benefitted indirectly from the relief that the UK is revising its controversial tax law.
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, boosting the Euro. Eurozone inflation reached double digits in September, climbing to 10% on an annual basis, compared to 9.1% in August. 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.
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.
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. The ongoing geopolitical crisis is putting pressure on Eurozone economies resulting in pressure on the Euro.
Several indicators of economic activity are due to be released on Tuesday for the Eurozone and may affect the Euro, especially the ZEW Economic Sentiment and German ZEW Economic Sentiment indicators.
The Sterling rallied on Monday, with the GBP/USD rate reaching the 1.143 level. If the GBP/USD rate goes up, it may encounter resistance near 1.149 and higher up at 1.173, while support may be found at the new all-time low of 1.035.
The Sterling had been declining for the past couple of weeks, as the announcement of the first ‘mini-budget’ brought the market’s distrust of the new British government, driving the pound to an all-time low. The budget included major tax cuts, which would primarily benefit the highest earners in a time of heightened economic pressure on British households.
Rising controversy on the mini-budget forced British Chancellor Kwasi Kwarteng to resign last week and Jeremy Hunt has been named the New Chancellor of the Exchequer. The British Government made a U-turn, revising its fiscal policy. Hunt announced on Monday that he would be reversing "almost all" the tax measures. PM Truss held a press conference on Friday, announcing that she will follow through with the previous government’s plan of raising corporate taxes to 25%.
The BOE had to resort to a new bond-buying program, to restore order to markets last week. 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 Bank of England raised its interest rate by 50 bps in its latest meeting, bringing the total interest rate to 2.25%. The BOE continues to tighten its monetary policy to bring inflation under control, although annual inflation in August dropped to 9.9% from 10.1% in July. 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.
The Yen continued to decline against the dollar on Monday, with USD/JPY trading above the 147.7 level representing 1998 high. The currency pair touched the 149 level on Monday, reaching a 32-year high. If the USD/JPY pair falls, support might be found near 143.5 and further down at 141.5. If the pair climbs, it may find further resistance higher up at the psychological level of 150 and higher still at the 1990 high near 160.
Minor economic indicators released on Monday for Japan were overall positive but failed to halt the Yen’s fall. The USD/JPY has been trading above the 145 level for the past week. This level represented a line in the sand for the Japanese government, which had rushed to intervene when the currency pair threatened to cross this level in September and back in 1998.
The Japanese Ministry of Finance intervened last month in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. Markets are bracing for a fresh intervention if the Yen continues to lose strength, although the government of Japan cannot support the Yen indefinitely. G7 ministers discussed the dollar’s excessive strength last week but no coordinated intervention was decided upon, leaving Japan to fend off for itself.
Japanese officials on Monday tried to stem the tide, warning that the Japanese government would offer a firm response to overly rapid Yen declines. Vice Finance Minister for International Affairs Masato Kanda said that each country would respond appropriately and firmly to excessive currency moves and Finance Minister Shunichi Suzuki stated that authorities would act decisively against excessive currency fluctuations.
On the other hand, the BOJ is unlikely to reverse its dovish policy to aid the struggling Yen. 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.
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