Dollar tumbles on increased recession concerns

Important Calendar Events

• JPY: M2 Money Stock
• GBP: Consumer Inflation Expectations
• USD: PPI and Core PPI, Preliminary UoM Consumer Sentiment, Preliminary UoM Inflation Expectation, Final Wholesale Inventories

USD

The dollar tumbled this week, as increased recession concerns reduce the odds of higher Fed interest rates. The dollar index dropped below the 105.0 level on Thursday, touching 104.7. US Treasury yields remained steady, with the US 10-year bond yielding between 3.5% and 3.4% throughout the day.

US Unemployment Claims on Thursday were in line with expectations, rising slightly to 230K this week from 226K last week.

The next US Fed monetary policy meeting is scheduled for next week on the 14th and traders are attempting to gauge the Fed’s intentions ahead of the meeting. A Fed blackout period has started on Saturday, which will last until the meeting, during which FOMC members do not deliver speeches that may reveal the central bank policy direction. The dollar maintained low volatility this week in the absence of more significant economic indicators and Fed rhetoric. 

Market expectations of future rate hikes were considerably trimmed in the past couple of weeks on cooling US inflation. US headline inflation printed at 7.7% year-on-year in October, compared to 8.2% in September. Fed Chair Jerome Powell delivered an unexpectedly dovish speech last week, stating that he sees rate hikes slowing down as soon as December.

The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. 

Several economic activities and health indicators are scheduled to be released on Friday for the US and may cause volatility in dollar prices. These include PPI and Core PPI, Preliminary UoM Consumer Sentiment, Preliminary UoM Inflation Expectation, and Final Wholesale Inventories. The PPI data are key indicators of inflation and may affect the dollar ahead of next week’s Fed meeting.

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EUR 

The Euro gained strength on Thursday as the dollar continued to decline and the EUR/USD rate climbed above 1.056. If the EUR/USD pair declines, it may find support at 1.029 and further down the parity level. If the currency pair goes up, it may encounter resistance at 1.061.

ECB rhetoric remains hawkish, with ECB President Christine Lagarde stressing the need to bring Eurozone inflation down. Lagarde has also stated though that how far and how quickly rates must rise will be determined by several factors. 

Revised GDP for Q3 of 2022 exceeded expectations, with the Eurozone economy expanding by 0.3% versus the 0.2% predicted. The economic outlook for the Eurozone seems to be improving, providing the ECB with some leeway toward tightening its fiscal policy. Many analysts, however, are predicting stagnation later this year and in the first quarter of 2023. 

Eurozone headline inflation showed signs of cooling in November, after hitting an all-time high in October. Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October, against expectations of a 10.4% print. 

With sparse data this week in the economic calendar, traders now await the ECB monetary policy meeting next week on the 15th, a day after the much-anticipated Fed meeting. In its latest monetary policy meeting, the ECB raised its interest rate by 75 basis points to 1.5%, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Market odds are currently in favor of a 50-bps rate hike at the ECB’s next monetary policy meeting. 

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GBP

The Sterling edged higher on Thursday on renewed risk sentiment. The dollar on the other hand withdrew and the GBP/USD rate climbed to 1.225. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.176 and further down near 1.035. 

The housing sector in the UK appears to be on a decline, as shown by data released on Wednesday and Thursday. RICS House Price Balance on Thursday, which is a leading indicator of housing inflation, declined by 25% in November, versus a 10% drop expected. The British Halifax HPI index on Wednesday, which is a measure of the housing industry's health, showed a contraction of 2.3% in the housing industry in November, against expectations of a drop of only 0.2%.

BOE Governor Andrew Bailey addressed the House of Lords last week in a speech that was less hawkish than expected, driving the Sterling down. Even though Bailey stated that the BOE was likely to continue raising interest rates, his stance was more moderate than expected, pointing to a slowing pace of rate hikes.

UK inflation hit a 41-year high in October, as annual CPI climbed to 11.1%, its highest value since 1981. October’s inflation exceeded September’s print of 10.1% and expectations of 10.7%. Inflation in the UK continues to rise, mainly due to the high cost of energy. Rising UK inflation is forcing the BOE to make some tough choices against a weak economic backdrop.

The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. UK monthly GDP for September dropped by 0.6%, against expectations of a more modest, 0.4% drop, indicating that the country is already in the grip of recession. Quarterly preliminary GDP for the third quarter of 2022 also came out negative, printing at -0.2%, compared to a 0.2% growth in the second quarter. The BOE predicts that the recession could last for almost two years, with expansion not expected again till mid-2024.

The next BOE monetary policy meeting is scheduled for next week on the 15th, a day after the Fed’s policy meeting. At their latest monetary policy meeting, BOE members voted to increase interest rates by 75 bps. Currently, the BOE’s interest rate is at 3.0% and the difference with the Fed’s rate of 4.0% is putting pressure on the Sterling. The BOE will also be introducing another round of gilt sales this month, as they shrink their balance sheets.

UK Consumer Inflation Expectations are scheduled to be released on Friday and may affect the Sterling a little.

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JPY

The Yen traded sideways against the dollar on Thursday, with the USD/JPY pair moving around the 136.5 level with low volatility. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 142.2 and further up at the psychological level of 145.0.

Important economic activity and health indicators were released on Thursday and were overall more optimistic than expected, but still raised alarms for the future of the Japanese economy. Bank lending expanded by 2.7% year-on-year in November, beating expectations of a 2.2% growth. The final GDP Price Index for the third quarter of the year showed economic contraction by 0.3% on an annual basis, which was, however, less severe than the 0.5% decline predicted. Final quarterly GDP for Q3 of 2022 printed at -0.2%, versus the -0.3% predicted. The Japanese economy shrank in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. Economy Watchers Sentiment in November dropped below the 50-point mark that denotes optimism, printing at 48.1 against expectations of 50.7.

BOJ CPI for October rose to 2.7% on an annual basis, against 2.0% in September and 2.2% predicted. Hotter than expected inflation in Japan is mainly due to the high cost of imported energy. National CPI rose by 3.6% year-on-year in October, beating expectations of a 3.5% rise. October’s data are much higher than September’s 3.0% print, indicating that Japan's price pressures continue to rise. 

In its latest policy meeting, the BOJ left its monetary policy unchanged, as expected. 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, especially with the Fed, puts the Yen at a disadvantage, driving its price down. 

Only minor economic indicators are due on Friday for Japan, which is not expected to affect the Yen significantly.

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Written by:
Myrsini Giannouli

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