Important calendar events
The dollar price was steady on Monday, with the dollar index fluctuating around the 112 level with low volatility. The absence of a Fed speech on Monday reduced the currency’s usual volatility. US Treasury yields remained strong, with the US 10-year bond yield climbing above 4.25%.
US Flash Services and Manufacturing PMI data released on Monday for October fell short of expectations. US business activity declined further this month, indicating increased economic weakness. Services PMI sank to 46.6 from 49.3 in September, versus the 49.2 expected. Manufacturing PMI fell slightly to 49.9 from 50.0 in September, versus the 51.0 expected.
High-risk aversion sentiment has been prevalent throughout the year and is increasing the safe-haven dollar’s appeal. At the same time, the Fed’s interest rate increase is attracting investors seeking higher returns, boosting the dollar. The US Central Bank has increased interest rates by a total of 300 basis points this year, bringing its benchmark interest rate to 3.25%. Another 75-bps rate hike is expected at the Fed’s next monetary policy meeting in November and has already been largely priced in by markets.
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.
US CB Consumer Confidence and Richmond Manufacturing Index are due on Tuesday, which are leading indicators of economic health and may affect the dollar ahead of the next Fed meeting.
No FOMC members’ comments are expected this week, as a black-out period started on Saturday, preventing further comments until the central bank’s next policy meeting in November.
The Euro withdrew against the dollar in early trading on Monday but pared its losses later in the day. The EUR/USD pair dropped to 0.981 but later climbed back to 0.989. If the EUR/USD pair declines, it may find support near the 0.963 level and further down at the 0.953 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.
On the data front, economic activity in the EU continues to contract. The manufacturing sector led the decline, with the German Flash Manufacturing PMI released on Monday falling short of expectations. Eurozone Flash Manufacturing PMI data plummeted to 46.6 in October, against 48.4 in September, registering a 29-month low. Flash Services PMI dropped to 48.2 in October compared to 48.8 in September.
Eurozone inflation seems to be cooling, albeit at a glacial pace. EU inflation in September dropped to 9.9% on an annual basis, after reaching an alarming 10% in August. Eurozone inflation fell short of expectations, which were again at double digits for September. Annual Core CPI, which excludes food and energy, was at 4.8% as expected. Lower than expected CPI caused the Euro to plummet last week, as it eases some of the pressure on the ECB to hike interest rates. With the next ECB policy meeting coming up this week, markets will be awaiting the Central Bank’s response. The ECB will need to continue its aggressive monetary tightening to tame soaring inflation rates.
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. In addition, the Euro has been pushed down by the gap in interest rates with the US, as the US Federal Reserve has increased its benchmark interest rate to 3.25% versus the ECB’s 0.75%.
German Import Prices, German Ifo Business Climate, and Belgian NBB Business Climate data are due on Tuesday. These are leading indicators of economic health and may ahead the Euro ahead of the ECB’s monetary policy meeting.
All eyes, however, are going to be at the ECB meeting on the 27th. Soaring EU inflation rates and hawkish ECB rhetoric increase the odds of a 75-bp rate hike this week. The ECB has been reluctant to raise interest rates, trying to balance soaring inflation against a poor economic outlook. Lately, however, ECB rhetoric has remained steadily hawkish, indicating a decisiveness in prioritizing inflation against economic growth. Markets have largely priced in a 75bp rate hike this week and the ECB will need to fulfill market expectations to keep the Euro’s recent upwards momentum. A rate hike of 50 bps or less, however, may see the Euro plummeting.
The Sterling exhibited high volatility on Monday, as the currency responded to political and economic developments in the UK. The GBP/USD rate opened near 1.140 on Monday but plummeted to 1.125. 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 near 1.092 and further down at the new all-time low of 1.035.
UK Flash Services and manufacturing PMI data released on Monday for October fell short of expectations, as business economic activity in the UK continues to contract. Flash Manufacturing PMI plummeted to 45.8 versus 48.4 in September, registering a 29-month low. Flash Services PMI slumped to 47.5 from 50.0 in September, against the 48.0 expected, which was a 21-month low.
UK Prime Minister Liz Truss resigned from her premiership last week after remaining only six weeks in office, stating that she is unable to deliver on the mandate that she was elected on. Political instability has been playing a major part in the currency’s decline over the past few weeks, driving the pound to an all-time low. Rising controversy on the first mini-budget, the government’s subsequent U-turn on the budget, as well as the resignation of several ministers, sealed the fate of Truss’ government.
A Conservative party leadership election was set to decide the UK’s next PM this week. After the resignation from the race of major rivals, Boris Johnson and Penny Mordaunt on Monday, Rishi Sunak was announced as the UK’s next PM. The Sterling continued to withdraw even after the announcement of Sunak’s win as the political turmoil of the past few weeks is hard to overcome.
Hotter-than-expected inflation print for September fuelled recession concerns driving the Sterling down. Annual inflation returned to 40-year highs in September, climbing to 10.1%, after cooling to 9.9% in August. The biggest jump in food prices since 1980 was largely responsible for the rising inflation. Core CPI, which excludes food and energy though, was up as well, rising to 6.5% on an annual basis in September, compared to 6.3% in August.
Rising UK inflation is forcing the BOE to make some tough choices. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. 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 adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy.
With the BOE’s November meeting drawing near, market odds are split between a mega-hike of 100bps and a less aggressive 75bps increase. After September’s inflation report, the odds remain slightly more in favor of the larger rate hike. Even though a sharp rate hike is being priced in, the Sterling continues to move toward its recent all-time low.
The BOE also announced a new round of bond sales last week. The British central bank will hold 8 bond sales Between November 1st and the end of the year, which will be evenly distributed across the short and medium-maturity sectors only in the 4th quarter of 2022. The BOE completed a short-term bond-buying program last week, buying long-dated gilts, which have been strongly affected by repricing.
The Yen resumed its decline on Monday, despite the BOJ’s presumed intervention early in the day. USD/JPY climbed to 149.5 in early trading, and suddenly plunged to 147, before slowly regaining the 149 level late on Monday. 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.
Japanese authorities likely staged an intervention on Friday and again on Monday morning to support the collapsing Yen, as evidenced by the currency’s sudden surges. The Yen had moved well above the psychological level of 150 against the dollar early on Friday, but jumped abruptly against the dollar in what was undoubtedly large-scale selling of dollars and buying Yen. Government officials have so far declined to comment on whether there was an intervention from the Japanese government to bolster the Yen. The suspected interventions failed to stem the tide, however, and the Yen continued to retreat later on Monday. The Japanese government cannot support the Yen indefinitely, as continuous interventions would not be sustainable.
The USD/JPY has been trading above the 145 level for the past couple of weeks. 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, buying Yen for dollars.
On the data front, Flash manufacturing PMI released on Monday for October was at 50.7, showing a slight contraction compared to the previous month’s 50.8. Services PMI increased in October, climbing to 53.0, versus September’s 52.2.
CPI data released last week revealed that annual inflation in Japan rose to 3% in September, exceeding expectations. BoJ Governor Haruhiko Kuroda did not appear worried about inflation rising above the central bank’s 2% goal. Kuroda stated that CPI is expected to slow down after peaking at the year’s end.
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. Surging US yields especially are putting pressure on the Yen.
All eyes are going to be on the BOJ policy meeting this week on the 28th, as pressure mounts on the central bank to end its negative rates policy, which is held largely to blame for the Yen’s weakness. The BOJ is unlikely to reverse its dovish policy to aid the struggling Yen, though, as BOJ Governor Kuroda is a staunch supporter of its dovish policy.
Annual BOJ Core CPI data are expected to be released on Tuesday and may cause some volatility in Yen price ahead of the BOJ’s meeting on Friday.
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