Important calendar events
The dollar experienced high volatility on Thursday, with the dollar index catapulting to 113.8 after the release of the US CPI data, but dropping to 112.2 soon afterward. US Treasury yields also seesawed following the release of the inflation data, with the US 10-year bond yielding above 4.0% immediately after and dropping almost to 3.9% later on.
US inflation rose by 0.4% every month in September according to Thursday’s CPI data. Annual inflation reached 8.2%, 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.
The release of the CPI report brought market volatility, with the US dollar and gilds shooting upwards immediately after, and stocks plummeting. Increased price pressures boosted the dollar and increased risk aversion sentiment, as rising inflation increases the odds of another steep Fed rate hike. The tide turned soon afterward though, as many market participants were anticipating high inflation data and the results had largely been priced in.
Core PPI, which excludes food and energy was in line with expectations on Wednesday, increasing by 0.3%, which was lower than August’s 0.4% increase. Monthly PPI exceeded expectations, rising by 0.4%, versus the 0.2% predicted, which represents a significant increase compared to the previous month’s drop of 0.1%.
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. Core PCE Price Index, the Fed’s favorite inflation gauge, increased 0.6% month-on-month in August, 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.
Global recession concerns are causing high market volatility ahead of the US inflation data on Thursday. Sharp rate hikes and continuous fiscal tightening run the risk of tipping some of the world’s leading economies into recession. World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva warned earlier this week of a growing risk of global recession while stressing the need to bring inflation under control.
Hawkish Fed rhetoric in the past few weeks has been increasing the odds of a steep rate hike at the Fed’s next monetary policy meeting. FOMC member Loretta Mester stated on Tuesday that US inflation is unacceptably high and persistent and that the Fed’s goal for next year is to bring it down to 3.5%. On Monday, FOMC member Charles Evans stated there was a strong consensus at the Fed to raise its interest rate to around 4.5% by March and hold it there until inflation was under control. Fed Reserve Vice Chair Lael Brainard also emphasized the central bank’s priority to fight the highest inflation in 40 years and stressed the risks of easing fiscal tightening prematurely.
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%.
Retail Sales and Consumer Sentiment data due on Friday may cause some volatility in dollar price after the release of the US inflation data on Thursday.
The Euro gained strength late on Thursday, after the release of US inflation data caused market volatility. The Euro dropped concerning the dollar in early trading and the EUR/USD pair fell to 0.963 as US inflation in September was higher than anticipated. The dollar declined later in the day though and EUR/USD climbed to 0.981. If the EUR/USD pair declines, 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.
US inflation exceeded expectations in September, putting extra strain on the Federal Reserve to continue with its policy of monetary tightening. The release of the CPI report brought market volatility, with the US dollar shooting upwards immediately after, as increased price pressures boosted the dollar. The dollar plummeted soon afterward though, as many market participants were anticipating high inflation data and the results had largely been priced in.
German inflation data released on Thursday for September fell within expectations at 1.9%, which was unchanged from last month’s print. German inflation remains at 10% on an annual basis, while 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.
Escalating Russian hostilities against Ukraine at the beginning of the week have triggered a risk-aversion sentiment. A series of Russian missile attacks against Ukrainian cities bolstered the safe-haven dollar. U.S. President Joe Biden spoke with Ukrainian President Volodymyr Zelensky on Monday condemning the latest attacks, while G-7 leaders vowed to help Ukraine for ‘as long as it takes.
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.
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.
Minor indicators of economic activity are due to be released on Friday for the Eurozone and may affect the Euro.
The Sterling rallied on Thursday, as the dollar weakened. The GBP/USD rate climbed to the 1.136 level after the release of the US inflation data. 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, which had been trading near an all-time low gained strength on Thursday. The Sterling had plummeted earlier in the week, pushed down by weak British economic activity data and uncertainty in economic decisions. Monthly GDP data showed that Britain’s economy unexpectedly shrank by 0.3% in August, which represents a considerable decrease compared to the previous month’s economic expansion of 0.1%. Recession concerns are weighing the currency down, as 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 Bank of England announced on Monday that it would increase its gilt market purchase program from a daily maximum limit of GBP5 billion to GBP10 billion for the rest of the week. The BOE had recently announced its bond-buying program, aiming to stem the sell-off in the UK gilt market by buying long-dated gilts, which have been strongly affected by repricing. On Monday, the BoE increased market liquidity ahead of the end of the gilt buying program on Friday. The BOE has re-affirmed its commitment to end its emergency bond-buying program as scheduled on Friday, although reports indicate that the program may continue a while longer, creating market uncertainty.
The Sterling has 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. Last week, however, the British Government made a U-turn, scraping some of the most controversial parts of the mini-budget, and boosting the Sterling.
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 Thursday and the USD/JPY pair reached a new 24-year high of 147.6. 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 1998 high of 147.7.
On Thursday the release of the US CPI data brought volatility in dollar price, gaining strength first and then plummeting. The Yen continued to decline even after the dollar lost strength in late-day trading on Thursday. The USD/JPY has been trading above the 145 level for the fifth consecutive day. This level seems to represent a line in the sand, as the Japanese government 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. It remains to be seen whether Japan will continue to defend the 145 level in the following days, although the government of Japan cannot sustain such a plan indefinitely. A Japanese government representative stated in a press conference on Tuesday that they will continue to monitor the FX market closely and take appropriate responses against excessive moves, hinting at another intervention.
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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