Important calendar events
The dollar dipped mid-week on dovish Fed rhetoric and the dollar index dropped to 105.6. The dollar rallied later in the week, however, on hot US inflation data, with the dollar index rising to 106.7. US bond yields also lost strength last week, with the US 10-year bond yielding approximately 4.62%.
The recent crisis in Israel has increased risk-aversion sentiment, providing support for the haven dollar. Fears of the conflict between Israel and Hamas spreading further in the Middle East, have turned traders towards safer investments.
Fed rhetoric turned dovish last week putting pressure on the dollar. Several policymakers made dovish statements, indicating that the Fed has likely reached its rate ceiling and that they might let high treasury yields do some of the work of tightening for them.
Federal Reserve Vice Chair Philip Jefferson stressed that the US Central Bank needs to proceed cautiously and cited the increase in Treasury yields as a potential further restraint on the economy. FOMC member Lorie Logan also stressed that the rise in US Treasury yields will potentially achieve further economic tightening. Fed policymaker Bostic delivered a dovish speech, stating that interest rates are sufficiently restrictive to bring inflation down to the Fed’s 2% target.
Fed rhetoric will be one of the main drivers of the dollar in the next few weeks as the dollar’s direction greatly depends on the Fed’s policy outlook. Market odds turned in favor of an end to rate hikes after several FOMC members hinted that the Fed has reached its rate ceiling.
Markets anticipate that Fed interest rates will remain the same this year, with an approximately 90% probability of a pause at November’s meeting and a more than 70% probability of an end to rate hikes through 2023. This is a major shift in market odds, as previous estimates showed a near 50/50 chance of another rate hike this year. The probability of another rate hike within the year has decreased, but the possibility of another increase in interest rates cannot be completely discounted and it is likely to affect the dollar in the coming weeks.
In September’s monetary policy meeting, FOMC members voted to keep interest rates unchanged at a target range of 5.25% to 5.50%. The Fed decided to pause rate hikes, but interest rates will likely remain in restrictive territory for longer.
On the data front, US inflation came in hotter than expected last week, increasing rate hike expectations, and boosting the dollar. US headline inflation in September remained at August's levels of 3.7% year-on-year, while market analysts were expecting a drop to 3.6%. CPI rose by 0.4% every month, which was lower than the previous month’s 0.6% but exceeded expectations of a 0.3% print. Core CPI, on the other hand, which excludes food and energy, dropped to a 2-year low of 4.1% year-on-year. Monthly Core CPI grew by 0.3% in September, in line with expectations. The housing index accounted for over half of the increase and was the largest contributor to the rise in price pressures.
US PPI inflation data last week also surprised on the upside. PPI rose by 0.5% in September, exceeding expectations of a 0.3% growth. Core PPI, which excludes food and energy, was also higher than expected, rising by 0.3% in September against 0.2% anticipated.
Core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July. This is the Fed’s preferred inflation gauge and a lower-than-expected print indicated that price pressures in the US are easing.
US inflationary pressures are not easing just yet though, despite the Fed’s high interest rates. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% expected. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US.
Final GDP data for the second quarter of 2023 showed that the US economy expanded by only 2.1% in Q2 of 2023 against expectations of 2.2% growth. The final GDP price index for the 2nd quarter of the year also came in below expectations at 1.7% versus 2.0% anticipated.
The Euro weakened against the dollar last week even as the dollar declined, and EUR/USD dropped to the 1.050 level. If the EUR/USD pair declines, it may find support at 1.044, while resistance may be encountered near 1.064.
Minutes of the latest ECB meeting were released last week and revealed an overall dovish outlook, putting pressure on the Euro. EU policymakers narrowly voted in favor of a rate hike in September and the minutes indicate that ECB members are content with the current rates and are unlikely to raise interest rates further.
The ECB raised interest rates by 25 bp at its September monetary policy meeting, bringing its main refinancing rate to 4.50%. The ECB had the difficult task of assessing the risk to the fragile Eurozone economy against high inflation rates.
The ECB has likely reached its interest rate ceiling, putting pressure on the Euro. ECB President Christine Lagarde has signaled an end to rate hikes but has warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
The IMF released its semi-annual World Economic Outlook report last week, issuing growth downgrades for some of the EU’s leading economies. Germany was among the worst performers, with GDP outlook for 2023 and 2024 GDP declining considerably against earlier estimates.
Headline inflation in the Eurozone fell to its lowest level in two years in September. Flash CPI cooled to 4.3% year-on-year in September from 5.2% in August against expectations of a 4.5% print. Core CPI Flash Estimate, which excludes food and energy, also came in cooler than anticipated. Core CPI eased to 4.5% in September from 5.3% in August versus 4.5% predicted. The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth.
Final GDP data for the Euro area showed that the Eurozone economy expanded by only 0.1% in the second quarter of the year against expectations of 0.3% growth. The Eurozone economy barely expanded in the second quarter after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
GBP/USD rose to the 1.233 level mid-week, as the dollar weakened, then plunged to the 1.213 level towards the end of the week, as the dollar gained strength, while, at the same time, the Sterling weakened. If the GBP/USD rate goes up, it may encounter resistance near 1.233, while support may be found near 1.200.
The British economy continues to struggle, registering only nominal growth. GDP data last week revealed that Britain’s economy only partially recovered in August after a sharp drop in July. The British economy expanded by 0.2% in August from a 0.6% contraction in July, in line with expectations.
Quarterly GDP data have shown that the British economy expanded at a higher pace than anticipated, expanding by 0.3% in the first three months of the year. GDP data for the second quarter of the year indicated a 0.2% expansion. More importantly, the UK's economy has grown by 1.8% since the pandemic started, beating the previous estimate of a 0.2% contraction.
The BOE maintained its official rate at 5.25% at its policy meeting in September against expectations of a 25-bp rate hike. The BOE has also signaled that it has likely reached its peak interest rate.
BOE Governor Andrew Bailey has stated that the central bank would be watching closely to see if further rate hikes are needed. Bailey also emphasized that the BOE will be holding interest rates in restrictive territory long enough to see inflation down to the bank’s 2% target.
British Inflation cooled more than expected in August, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.7% year-on-year in August from 6.8% in July against expectations of 7.0%.
A combination of a struggling economy and high inflation is making the BOE’s task more difficult. Further tightening is needed to bring inflation down at the risk of tipping the British economy into recession. The state of the British economy remains fragile, as prolonged tightening has taken its toll on the labor market and other vital economic sectors.
USD/JPY shot up last week, climbing to the 149.8 level and closing near 149.5 on Friday. If the USD/JPY pair declines, it may find support near 148.2. If the pair climbs, it may find resistance at 150.
The dollar gained strength towards the end of last week, as US inflation data surprised on the upside, and USD/JPY moved again close to the key 150 level.
The Yen briefly gained strength early last week, after the Kyodo news agency reported that the BOJ is considering raising its forecast for core consumer inflation this year. Still, the news was not sufficient to support the Yen and the currency dipped later in the day.
The Japanese government intervened recently to support the Yen as USD/JPY rose briefly above the 150 level, which is considered a line in the sand for an intervention. The Yen continued to retreat after a brief respite, and the USD/JPY rate moved precariously close to the key 150 level again last week.
Japanese authorities have been repeatedly warning speculators against excessive short selling of the Yen and have stepped in before to provide support for the Yen. The effect of such an intervention, however, is usually short-lived and cannot be sustained for long before the USD/JPY resumes its bullish momentum. The main goal of the Japanese government is to discourage speculators from excessive short-selling of the Yen.
The BOJ has maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have been moving in a hawkish direction for over a year. The Yen becomes even more vulnerable as other major central banks continue raising interest rates and the monetary policy divergence between the Fed and the BOJ becomes more pronounced.
At its policy meeting in September, the BOJ maintained its short-term interest rate target steady at -0.10% and showed no signs of relaxing its ultra-easy policy.
Market odds of a BOJ rate hike in January have increased above 60%. BOJ Governor Kazuo Ueda has hinted that a policy shift may finally be on the horizon.
National Core CPI dropped to 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI climbed to 3.3% on an annual level in August beating expectations of 3.2%.
Final GDP data for the second quarter of the year showed that the Japanese economy expanded by 1.2%, disappointing expectations of 1.4% growth. The final GDP Price Index showed a 3.5% annual expansion, versus 3.4% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
Gold prices spiked at the end of last week, touching the $1,932 per ounce level. If gold prices increase, resistance may be encountered near $1,947 per ounce, while if gold prices decline, support may be found near $1,844 per ounce.
The crisis in Israel has intensified, giving rise to a risk aversion sentiment, and boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of haven assets such as gold. Regional escalation into Iran caused gold prices to skyrocket, as the Iranian government issued a stern warning to Israel. The US has in turn warned Iran against further escalation. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value.
Risk sentiment improved this week, however, despite the continued crisis in Israel. The US Federal Reserve hinted that it has reached its rate ceiling, boosting the economic world economic outlook. Improved risk sentiment halted gold’s rally on Tuesday, but gold prices continued to rise on Wednesday. Market expectations that US interest rates have peaked are raising the comparative appeal of gold as a haven asset, while the dollar sinks.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar dipped mid-week on dovish Fed rhetoric and the dollar index dropped to 105.6. The dollar rallied later in the week, however, on hot US inflation data, with the dollar index rising to 106.7. US bond yields also lost strength last week, with the US 10-year bond yielding approximately 4.62%.
Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. FOMC members kept interest rates unchanged at a target range of 5.25% to 5.50% at the Fed’s September meeting.
The Federal Reserve paused rate hikes at its latest meeting but is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are under pressure since gold presents a less attractive option as an investment than interest-yielding treasury bonds.
Oil prices were volatile last week, with WTI price dropping mid-week then surging towards the end of the week and reaching the $87.8 per barrel level on Friday. If WTI price declines, it may encounter support near $81.6 per barrel, while resistance may be found near $90.5 per barrel.
The crisis between Israel and Hamas has intensified, threatening to spill over to other Middle Eastern countries. Fears of a potential Iranian involvement caused oil prices to surge last week. Regional escalation into Iran caused oil prices to spike last week, as the Iranian government issued a stern warning to Israel. The US has in turn warned Iran against further escalation. Supply concerns eased a little mid-week, as the Saudi Arabian government stated that it is working on preventing an escalation of the crisis and pledged to help stabilize the market.
Supply concerns intensified last week as the US tightened its sanctions program against Russian crude exports. The US announced a new set of measures that will make it harder for Russian shipping companies to violate the G7′s oil price cap.
OPEC raised its oil demand forecast last week, further boosting oil prices. The organization announced that it sees demand going higher and estimated that approximately $14 trillion may be needed to meet the projected demand.
OPEC+ kept its output policy unchanged at its latest meeting, maintaining its recent cuts by Russia and Saudi Arabia, which have already been extended till the end of the year.
Supply concerns have also been boosting oil prices. Russian authorities have decided to restrict diesel and gasoline exports to stabilize domestic fuel prices. Russia, however, eventually decided to relax the fuel ban, assuaging supply concerns. Russia initially lifted restrictions on certain fuel types, specifically fuel used as bunkering for some vessels and diesel with high Sulphur content. Last week Russia partially relaxed the fuel ban once again, allowing seaborne diesel exports.
The Energy Information Agency reported an unexpectedly large US crude oil build last week. Crude oil inventories rose by 10.2M barrels for the week ending October 6th, up from a 2.2M barrel decline the week before and a 0.4M barrel drop predicted.
A strong US dollar and high-interest rates keep oil prices in check. The oil demand outlook has declined as the Fed has hinted at further tightening. The Fed decided to pause rate hikes at its September policy meeting, but that does not necessarily mean it has reached its rate ceiling. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer, driving oil demand outlook and oil prices down.
Deterioration in China’s economic outlook is also keeping oil prices down. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. Bloomberg reported last week that the Chinese government is considering raising its sovereign debt by more than $130 billion to provide stimulus for its struggling economy.
Crypto markets declined last week as geopolitical events soured risk sentiment. The war between Israel and Hamas is putting pressure on cryptocurrencies. The conflict rages on in the Gaza area causing market turmoil.
Cryptocurrency prices also dropped after the release of hotter-than-expected US CPI inflation data last week. Inflationary pressures in the US remain sticky, increasing rate hike expectations.
Increases in central banks’ interest rates sour risk sentiment, driving risk assets down. The Fed kept interest rates stable at its September policy meeting, but interest rates are likely to stay in restrictive territory for a longer period, hindering economic growth. Risk sentiment improved earlier in the week, as dovish Fed Rhetoric raised expectations of an end to rate hikes, but Thursday’s inflation data raised rate hike odds once again.
Low-risk sentiment in the past couple of weeks has been putting pressure on crypto markets. Global economic concerns are driving risk sentiment down, as prolonged economic tightening restricts economic growth.
Bitcoin price dropped below the key $27,000 level last week but rallied over the weekend rising to $27,200. If the BTC price declines, support can be found near $26,500, while resistance may be encountered near $28,100.
Ethereum price also plummeted mid-week, testing the $1,530 level support, but pared some losses over the weekend, climbing back to $1,560. If Ethereum's price declines, it may encounter support near $1,500, while if it increases, resistance may be encountered near $1,660.
BTC/USD 1h Chart
ETH/USD 1h Chart
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