Important calendar events
The dollar declined on Thursday and the index dropped from 104.0 to 103.8. On the other hand, US treasury yields gained strength with the US 10-year bond yielding approximately 4.29%.
Core PCE Price Index, data on Thursday came in within expectations. Core PCE Price Index is the Federal Reserve’s preferred inflation gauge and may affect the Fed’s rate outlook. US core PCE rose by 0.3% in September, Annual core PCE inflation remained steady at 2.7% in September against the 2.6% anticipated. US Unemployment claims released on Thursday were more optimistic than anticipated, boosting the dollar. US Unemployment Claims dropped to 218K for the week to October 25, from 228K the week before and against expectations of 229K.
Advance GDP data released on Wednesday for the year's third quarter were disappointing. The US economy expanded by only 2.8% in Q3 of 2024, after rising by 3.0% in the second quarter of the year and 1.4% in the first quarter. Markets were anticipating 3.0% growth in the third quarter of 2024, and a lower-than-expected print put pressure on the dollar. The US economy is suffering from prolonged tightening, raising recession concerns.
However, strong US ADP Employment data on Wednesday provided support for the dollar. ADP Non-Farm Employment Change rose to 233K in October, exceeding expectations of 110K, while September’s print was revised upward to 159K.
The Federal Reserve cut its benchmark interest rate by 50 basis points to a target range of 4.75% to 5.00% in September, after holding interest rates steady since last July. The Fed launched its easing cycle with an aggressive rate cut, signaling the end of its restrictive monetary policy. Fed Chair Jerome Powell stated that the central bank aims to strengthen the US economy and labor market. Powell has hinted that the Fed has launched its easing cycle and that more rate cuts will follow.
Market odds of a 25-bp rate cut in November are currently approximately 90%. The dollar remains sensitive to rate-cut expectations and will likely continue to fluctuate strongly in the next few weeks.
US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2.0% target. Headline inflation cooled slightly to 2.4% in September from 2.5% in August against expectations of a drop to 2.3%. Monthly CPI rose by 0.3% in September, surpassing expectations of 0.2% growth. Annual core CPI, which excludes food and energy, rose to 3.3% in September from 3.2% in August. Monthly core CPI rose by 0.3% exceeding expectations of 0.2% growth.
One of the key drivers of the dollar right now is the outcome of the US Presidential race. The US elections on November 5th are attracting considerable market attention. Trump’s proposed tariffs and tax policies will support economic growth, boosting the dollar. If, on the other hand, Kamala Harris wins, she might adopt a more moderate approach to fiscal policy, which will put pressure on the dollar. Currently, polls are showing that Trump and Harris are neck-in-neck. The implications of the election outcome, however, are complex and will likely cause volatility in the price of the dollar in the weeks to come.
Important US labor data are due on Friday, including Average Hourly Earnings, Non-Farm Employment Change, and Unemployment Rate. Non-farm payrolls (NFPs) in particular are among this week’s most highly anticipated fundamentals. NFPs provide estimates on the number of jobs created in the US and they are leading indicators of economic growth.
EUR/USD gained strength on Thursday, rising from 1.085 to 1.089 as the dollar weakened. If the EUR/USD pair declines, it may find support at 1.076, while resistance may be encountered near 1.091.
Inflation data for some of the EU’s leading economies released on Wednesday showed that inflationary pressures in the Eurozone are not cooling as fast as expected. This was confirmed by CPI data on Thursday for the Eurozone as a whole. Eurozone inflation rose to 2.0% year-on-year in October from 1.7% in September, against expectations of 1.9%. Core CPI, which excludes food and energy, also came in higher than anticipated, remaining steady at 2.7% in October, against expectations of a 2.6% print.
Preliminary Flash GDP data for the third quarter of the year, released on Wednesday exceeded expectations, boosting the Euro. The Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2 against initial estimates of 0.2% growth. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. Germany, the Eurozone’s leading economy, grew by 0.2% in the third quarter of the year, avoiding entering into recession as was predicted by analysts. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
The ECB lowered its benchmark interest rate by 25 basis points in October, bringing its main refinancing rate to 3.40%. The ECB started its easing cycle in June, lowering interest rates by 25bps for the third time this year in October.
ECB President Christine Lagarde has stated that the decision to cut interest rates was unanimous, but did not commit to future rate cuts. Lagarde stressed that economic activity in the Eurozone is slowing down inducing the ECB to lower interest rates. She also stated that policymakers are confident that inflation will drop to the central bank’s 2% target in 2025 but stressed that there are both upside and downside risks to inflation.
In an interview with the French newspaper Le Monde on Thursday, Lagarde appeared satisfied with the progress of disinflation in the Eurozone. Lagarde stated that the ECB’s 2% inflation goal is in sight but stresses that inflationary pressure is still not under control. ECB’s Joachim Nagel stated that price stability is not far off, while ECB policymaker Isabel Schnabel warned that rate cuts should be gradual.
GBP/USD plummeted from 1.295 to 1.286 on Thursday. If the GBP/USD rate goes up, it may encounter resistance near 1.305, while support may be found near 1.280.
Britain’s new Labour Government announced its first budget on Wednesday, causing volatility in the price of the Sterling. The Sterling plummeted ahead of the announcement of the Autumn Forecast Statement on Wednesday but recovered soon after. Markets had time to digest the news on Thursday and the Sterling dipped. UK Chancellor of the Exchequer Rachel Reeves revealed a 40 billion pound tax rise, which will be spent largely on the health and energy sectors.
The BOE voted to maintain its restrictive monetary policy in September, while the US Federal Reserve pivoted to a more dovish policy and voted in favor of a sharp 50-bp rate cut. The difference in policy outlook between the Fed and the BOE is boosting the Sterling against the dollar.
The BOE kept its official rate at 5.25% to 5.00% after cutting interest rates in July. BOE policymakers voted to keep interest rates steady with a majority of 8-1. Bank of England Governor Andrew Bailey has stated that he is optimistic that inflationary pressures in the UK will ease sufficiently to allow for the BOE to cut interest rates further.
Markets anticipate that there will be one more 25bps BOE rate cut in 2024, bringing the total decrease in interest rates to 50bps for the entire year. In contrast, two more Fed rate cuts of 25 bps each are priced this year. After September’s 50-bps Fed rate cut, this will mean that the Fed will lower interest rates by a total of 100 bps in 2024. The Fed’s recent dovish shift compared to the BOE’s more hawkish policy is putting pressure on the Sterling against the dollar.
Headline inflation in the UK dropped to 1.7% year-on-year in September from 2.2% in August against expectations of a print of 1.9%. Core annual inflation, which excludes food and energy, dropped to 3.2% in September from 3.6% in August against 3.4% anticipated. Inflation in the UK has cooled to its lowest level since April 2021 and may induce the BOE to start cutting interest rates more aggressively.
GDP data showed that the British economy grew unexpectedly in August. The UK economic outlook has improved as the British economy expanded by 0.2% in August after remaining stagnant in June and July. The British economy expanded by just 0.5% in the second quarter of the year, failing projections of 0.6% and following 0.7% growth in the first quarter of 2024.
The Yen gained strength after the BOJ policy meeting on Thursday and USD/JPY plunged from 153.5 to 151.9. If the USD/JPY pair declines, it may find support at 151.4. If the pair climbs, it may find resistance at 153.8.
The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its policy meeting on Thursday. The BOJ had pivoted to a more hawkish policy at its meeting in July, raising interest rates by 15 basis points, the BOJ’s largest rate hike since 2007. The BOJ had already hiked interest rates once more in March, ending its negative interest rate policy.
Markets were not expecting a change in policy at Thursday’s meeting and focused instead on the BOJ’s forward guidance. BOJ Governor Kazuo Ueda delivered a hawkish speech after the policy meeting, boosting the Yen. Ueda hinted at another rate hike in the following months, if economic and inflationary conditions are met. Data emphasized, however, that the BOJ’s policy will be data-driven and stated that the central bank will scrutinize data before each policy meeting.
Political uncertainty in Japan caused the Yen to plummet at Monday’s market opening. Japan's ruling Liberal Democratic Party failed to secure a majority in the House of Representatives election. Prime Minister Shigeru Ishiba's coalition lost its parliamentary majority on Sunday. Without securing a majority, the Japanese government will find it difficult to enforce its economic and legislative goals.
Inflation in Japan dropped to 2.4% year-on-year in September from 2.8% in August against expectations of a 2.3% print. BOJ Core CPI remained at 1.8% year-on-year in August, the same as in July. Annual Tokyo Core CPI fell to 1.8% in October from 2.0% in September, which was in line with expectations. Inflation in Japan remains weak lowering the odds of another BOJ rate hike this year.
Japan’s economy expanded by 0.7% in the second quarter of the year. The Japanese economy has started to expand, after shrinking by 0.5% in the first quarter of the year.
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