Important calendar events
The dollar remained firm on Tuesday, and the index hovered close to 106.2. US treasury yields declined on Tuesday, with the US 10-year bond yield dropping from 4.42% to 4.39%.
The dollar surged last week as Republicans secured full control of the US Government, which will allow Trump’s administration to pass legislation on key issues, such as immigration and taxation. Trump’s proposed tariffs and tax policies are expected to support economic growth, boosting the dollar. In addition, the import tariffs imposed are expected to drive inflation higher. This may force the Fed to keep interest rates at restrictive levels longer. The effects of Trump’s victory on markets are starting to fade this week, however, causing the dollar to decline.
The dollar has been supported by increased safe-haven demand as the crisis in Russia escalates. Tensions between Russia and Ukraine flared over the weekend. Safe-haven demand rose after US President Joe Biden green-lighted Ukraine’s use of US-bought missiles against Russia. Russia has deployed North Korean troops into Ukraine, which fuelled Biden’s decision to permit Ukraine to use the rockets. These long-range missiles can reach deep into Russian territory and Biden’s decision can cause the crisis in Ukraine to escalate further. Ukraine has already launched the first missiles into Russia, according to a report by Bloomberg released on Tuesday.
Reports that Russian President Vladimir Putin updated Russia's nuclear doctrine boosted safe-haven demand on Tuesday. Dmitry Peskov, Press Secretary of the President of the Russian Federation, said on Tuesday that Russia might use nuclear weapons if it was subject to a conventional missile assault supported by a nuclear power. The Russian Government’s message came as a response to Biden’s approval of the use of US missiles by Ukraine against Russia. Peskov also threatened that Biden’s approval of the use of rockets by Ukraine could lead to a third world war.
The US Federal Reserve cut interest rates by 25 basis points in November to a target range of 4.50% to 4.75%. The Fed had already launched its easing cycle in September, with an aggressive 50-bp rate cut, signaling the end of its restrictive monetary policy.
Fed Chair Jerome Powell stated that the progress of disinflation is steady, and the labor market is strong, permitting a shift towards a more neutral monetary policy. Odds of another rate cut in December dropped to 60% this week from 90% the week before, providing support for the dollar.
Persistent price pressures may prevent the Federal Reserve from pivoting to a less restrictive monetary policy. US inflation is proving to be sticky despite the Federal Reserve’s efforts to bring it down to its 2.0% target. Headline inflation rose to 2.6% year-on-year in October from 2.4% in September. Monthly CPI rose by 0.2% for the fourth consecutive month in October, which was in line with expectations. Annual Core CPI, which excludes food and energy, rose by 3.3% in October and monthly core CPI rose by 0.3%, as predicted by markets in both cases.
The US economy expanded by only 2.8% in the third quarter of 2024, after rising by 3.0% in the second quarter of the year and by 1.4% in the first quarter of the year, while markets were anticipating 3.0% growth in the third quarter of 2024. The US economy is suffering from prolonged tightening, raising recession concerns.
Key releases that may affect the dollar this week include US unemployment claims on Thursday, as well as Manufacturing and Services PMI data on Friday.
EUR/USD dipped from 1.059 to 1.054 in early trading on Tuesday but pared losses later in the day, rising back to 1.059. If the EUR/USD pair declines, it may find support at 1.049, while resistance may be encountered near 1.066.
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 not committed to future rate cuts. Lagarde stressed that economic activity in the Eurozone is slowing down, prompting 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.
Flash GDP data showed that the Eurozone economy expanded by 0.4% in Q3 of 2024, rising from 0.2% in Q2. The Eurozone economy also expanded by 0.3% in the first quarter of 2024. The economic outlook of the EU remains fragile as prolonged tightening has brought the Euro area economy to the brink of recession.
Inflationary pressures in the Eurozone are not cooling as fast as expected. 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.
The Euro has been under pressure due to political turmoil in Germany, the Eurozone’s leading economy. German Chancellor Olaf Scholz has fired Finance Minister Christian Lindner, causing the collapse of the three-party coalition that was ruling Germany. The country will be headed towards elections and political instability is expected to cause volatility in the Euro in the coming months.
This coming week, important economic activity indicators for the Eurozone are scheduled to be released on Friday. Manufacturing and Services PMI data are due on Friday for some of the Euro area’s leading economies and for the EU as a whole, which may cause volatility in the price of the Euro.
GBP/USD declined to 1.262 in early trading on Tuesday as the dollar gained strength, but pared the day’s losses later, rising back to 1.268. If the GBP/USD rate goes up, it may encounter resistance near 1.288, while support may be found near 1.260.
At the latest BOE policy meeting, MPC members voted with a strong majority of 8-1 to cut rates to 4.75%. Bank of England Governor Andrew Bailey stated that the central bank intends to adopt a gradual approach to cutting interest rates. This would give policymakers time to assess the impact of the Government’s new budget on inflation.
The British Monetary Policy Report Hearings were released on Tuesday causing volatility in the price of the Sterling. BOE Governor Andrew Bailey testified on inflation and the economic outlook before the Parliament's Treasury Committee on Tuesday. Testifying about the MPC’s decision to lower interest rates at November’s policy meeting, Bailey stated that disinflation in the US is progressing at a faster pace than anticipated, which allowed the central bank to cut interest rates. Bailey also stressed, however, that Services inflation is still above a level that's compatible with on-target inflation and that a gradual approach to policy normalization is required. Bailey’s remarks were perceived by markets as hawkish and the Sterling declined as BOE rate cut expectations in December dropped.
On the data front, GDP data showed that the British economy contracted by 0.1% % in September, falling short of expectations of 0.2% expansion. In addition, Preliminary GDP data for the third quarter of the year showed that the British economy expanded by just 0.1% against expectations of 0.2% expansion. In addition, GDP data for the second quarter of 2024 were revised downward to reflect 0.5% growth against initial estimates of 0.6%.
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.
Headline inflation data are due on Wednesday and analysts anticipate an uptick in British inflation in October, which may prevent the BOE from cutting interest rates further.
USD/JPY dropped from 154.6 to 153.4 in early trading on Tuesday but recovered the day’s losses later. If the USD/JPY pair declines, it may find support at 152.3. If the pair climbs, it may find resistance at 156.8.
USD/JPY has been trading close to the 155.0 level, which is considered a line in the sand for another intervention in support of the Yen. Japanese officials issued strong warnings on Tuesday against excessive short-selling of the Yen. Japanese Finance Minister Katsunobu Kato reiterated his former statement that the government is prepared to respond appropriately to sharp currency movements.
The BOJ maintained its current monetary policy guidelines steady and its interest rate at 0.25% at its latest policy meeting. 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.
BOJ Governor Kazuo Ueda’s forward guidance was hawkish. Ueda hinted at another rate hike in the following months, if economic and inflationary conditions are met. Ueda emphasized, however, that the BOJ’s policy will be data-driven and stated that the central bank will scrutinize data before each policy meeting.
Ueda delivered another hawkish speech on Monday, boosting the Yen. Ueda said that keeping interest rates low for too long could cause inflation to spike uncontrollably, forcing the BOJ to raise interest rates aggressively. Ueda, however, did not provide a specific timeline for rate hikes and markets doubted that the central bank could raise interest rates soon, causing the Yen to deflate.
On the data front, Japan’s economy expanded by 0.2% in the third quarter of the year, down from 0.7% in the second quarter. The Japanese economy has started to expand, after shrinking by 0.5% in the first quarter of the year.
Headline 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.
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Written by:
Myrsini Giannouli
présence dans l'industrie en tant que fournisseur de liquidités
et une exécution fiable
séparés
de premier ordre
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