Important calendar events
The dollar continued to gain strength on Thursday, with the dollar index touching the 106.8 level. US bond yields declined on the other hand, with the US 10-year bond yielding approximately 4.85%.
The 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.
The US economy seems to be recovering, boosting the dollar. US economic activity data this week were overall positive, indicating economic growth. Advance GDP data for the third quarter of 2023 showed that the US economy expanded by 4.9%, against expectations of 4.5% growth and far surpassing the 2.1% growth of Q2. Advance GDP price index for the 3rd quarter of the year reached 3.5%, exceeding expectations of a 2.7% print. Durable goods orders rose by 4.7% in September, above market forecasts of a 1.7% rise, and rebounding from a 0.1% contraction in August. Unemployment claims released on Thursday reached 210K, which was in line with expectations.
Both the Manufacturing and Services sectors started to expand in October. Flash Manufacturing and Services PMI data on Tuesday showed that both sectors left the previous contractionary territory, with a PMI print above the threshold of 50 denoting industry expansion.
Markets anticipate that Fed interest rates will remain the same this year, with an approximately 95% probability of a pause at next week’s meeting and a more than 70% probability of an end to rate hikes through 2023. 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 are likely to remain in restrictive territory for longer.
Hotter than expected US inflation increased rate hike expectations. 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%.
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.
Several economic activity indicators are due on Friday and are likely to cause volatility in the price of the dollar. The most important indicator due on Friday is the Core PCE Price Index. This is the Fed’s preferred inflation gauge, and it is likely to affect the dollar ahead of the Fed interest rate decision next week.
The Euro dipped after the ECB policy rate decision on Thursday and EUR/USD touched the 1.052 level support, but pared losses later in the day, climbing back to the 1.056 level. If the EUR/USD pair declines, it may find support at 1.052, while resistance may be near 1.069.
The ECB policy rate announcement on Thursday held few surprises. The ECB decided to keep interest rates unchanged at 4.50%. The pause in rate hikes was widely expected and market reaction was somewhat muted. The Euro dipped even further after the rate announcement, as markets expect that the ECB has hit its rate ceiling, putting pressure on the Euro.
The ECB is tasked with assessing the risk to the fragile Eurozone economy against high inflation rates. In its monetary policy statement, the ECB indicated that inflation will likely remain high for a long time. The central bank, however, stressed that interest rates have already been raised to high levels, and will continue to be transmitted into financing conditions.
ECB President Christine Lagarde, speaking at the end of the monetary policy meeting has hinted at an end to rate hikes. Lagarde highlighted the risks to the Eurozone economy stressing that the economy is likely to remain weak for the remainder of the year. Lagarde also stated that it is too early to talk about rate cuts and warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
Disappointing economic activity data put pressure on the Euro this week. German business activity fell further into contractionary territory according to PMI data released on Tuesday, raising recession concerns for the Eurozone’s leading economy. PMI data for the Euro area were also weak. EU Flash Manufacturing PMI fell to 43.0 in October from 43.4 in September, with a print below 50 indicating industry contraction. The Service sector also dropped further into contractionary territory in October, with Flash Services PMI falling to 47.8 from 48.7 in September, indicating that the sector is shrinking at an accelerating pace.
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 plummeted in early trading on Thursday, dropping to the 1.206 level, but rallied later in the day, rising to 1.213. If the GBP/USD rate goes up, it may encounter resistance near 1.228, while support may be found near 1.206.
Disappointing economic activity data put pressure on the sterling this week. Britain’s unemployment rate held steady at 4.2% according to data released on Tuesday. The Manufacturing sector remained in contractionary in October, although the sector shrank at a slower pace than previously. Flash Manufacturing PMI in October rose to 45.2 from 44.3 in September. The Services sector also continued to contract with Flash Services PMI in October at 49.2, slightly down from September’s 49.3.
The British economy continues to struggle, registering only nominal growth. GDP data 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.
This week’s fundamentals showed that the British economy remains fragile, reinforcing the notion that the BOE has reached its peak interest rates. Prolonged tightening has taken its toll on the labor market and other vital economic sectors.
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 is not cooling down fast enough, despite the BOE’s consistently hawkish policy. Headline inflation remained at 6.7% year-on-year in September, the same as in August, against expectations of a drop to 6.6%.
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.
USD/JPY continued to gain strength on Thursday, trading firmly above the key 150 level and touching 150.6. If the USD/JPY pair declines, it may find support near 149.3. If the pair climbs, it may find resistance at the psychological level of 151.0 and further up to its highest point in October 2022 of 151.9.
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. This week, however, the currency rate rose once again above the key 150 level, but the Japanese government has so far not intervened to bring the currency rate down.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen and have stepped in several times to provide support for the Yen. Japanese Finance Minister Shunichi Suzuki warned traders again on Thursday against selling the yen, stating that authorities were closely watching currency moves. Market participants are aware that another intervention may bring the currency rate down forcibly and are hesitant to bid excessively against 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. 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 2.8% in September from 3.3% in August. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy.
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.
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Written by:
Myrsini Giannouli
चलनिधि प्रदाता के रूप में उद्योग उपस्थिति
और विश्वसनीय निष्पादन
ग्राहक धन
ग्राहक सहायता
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