Important calendar events
The dollar started low last week, with the dollar index near the 104.9 level. The dollar rallied at the end of last week though, on hawkish Fed comments, with the dollar index climbing to the 105.8 level. US treasury yields fell at the beginning of last week but rebounded towards the end of the week, with the US 10-year bond dropping to 4.48% mid-week and then climbing back to 4.64%.
At the latest Fed meeting in November, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones, stressing that the Fed is still not confident that current interest rates will be restrictive enough to achieve the central bank’s 2% inflation goal and warning that another rate hike in December is not out of the table.
Markets are not convinced that the Fed intends to resume its tightening cycle. Markets are pricing at an end to rate hikes and are even starting to price in rate cuts. Markets are always ahead of events and are already pricing at an end to the Fed’s tightening policy.
Market expectations of rate cuts have brought the US dollar and treasury yields down in the past few days. The Fed, however, has been relying on high treasury yields to complement its tightening policy. Plummeting treasury yields may derail the Fed's plans to end rate hikes or force the Fed to keep interest rates at high levels for longer.
The Fed has likely become alarmed by the recent plunge in treasury yields. Fed Chair Jerome Powell was especially hawkish last week, in an attempt to bring yields back up. Fed Chair Jerome Powell delivered a hawkish speech on Thursday, boosting the dollar and treasury yields. Powell reiterated that policymakers are not confident that they have achieved a sufficiently restrictive stance to return inflation to the Fed’s 2.0% target. Powell also warned that a sustainable drop in inflation is not guaranteed and hinted that stronger economic growth could warrant higher rates.
A lot is riding on this week’s inflation data. The Fed has made it clear that its approach from now on will be data-driven. This week's CPI data on the 14th and PPI data on the 15th will likely play a decisive role in December's interest rate decision.
The US economy is recovering, boosting the dollar. 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.
Core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in September, in line with expectations. Core PCE Price Index dropped to 3.7% year-on-year in September from a 3.8% print the previous month. Inflationary pressures in the US are easing, reinforcing the notion that the Federal Reserve will not have to raise interest rates further. US headline inflation in September, however, remained at August's levels of 3.7% year-on-year, while market analysts were expecting a drop to 3.6%.
EUR/USD edged lower last week, touching the 1.066 level as the dollar rallied. If the EUR/USD pair declines, it may find support at 1.052, while resistance may be encountered near 1.076.
The ECB decided to keep interest rates unchanged at 4.50% in October. Markets anticipate 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 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.
ECB policymakers last week were hawkish, warning that further progress is needed to tame inflation. ECB Vice President Luis de Guindos stated on Thursday that it is premature to discuss rate cuts, as there are still some risks to the inflation outlook.
On the data front, Eurozone retail sales fell 0.3% in September against expectations of a 0.2% drop, according to data released on Wednesday. EU retail sales fell by 2.9% year-on-year in September, indicating weak consumer demand. According to data released on Tuesday, German industrial production fell by 1.4% in September, falling short of expectations of a 0.1% drop.
Final Services PMI data released on Monday for the Euro area fell within expectations. EU Services PMI in October remained in contractionary territory, with a 47.8 point, the same as in September and below the 50 level that denotes industry expansion.
Preliminary GDP data for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year against expectations of stagnation. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
The economic outlook of the Eurozone appears to be deteriorating, putting pressure on the Euro. The ECB Economic Bulletin released last week presented a poor economic outlook, putting pressure on the Euro. According to the bulletin, the Eurozone economy is likely to remain weak for the remainder of 2023.
Headline inflation in the Eurozone fell to its lowest level in two years in October, mainly due to a drop in energy prices. Flash CPI cooled to 2.9% year-on-year in October from 4.3% in September against expectations of a 3.1% print. Core CPI Flash Estimate, which excludes food and energy, was in line with expectations. Core CPI eased to 4.2% year-on-year in October from 4.5% in September. The ECB’s efforts to curb inflation rates are paying off, even due to decreased economic growth.
The GBP/USD rate declined last week, dropping to the 1.222 level as the dollar gained strength against rivaling currencies, while the Sterling declined. If GBP/USD rate goes up, it may encounter resistance near 1.250, while support may be found near 1.206.
UK GDP data released on Friday revealed that the British economy remained stagnant during the third quarter of 2023. Markets, however, were expecting a contraction of 0.1% in Q3 of 2023, which would represent the start of the recession. The British economy expanded by 0.3% in the first quarter of the year and 0.2% in the second quarter. Economic growth is slowing down in the UK and the country is on the brink of recession.
UK Construction PMI data on Monday were disappointing, dragging the Sterling down. The construction sector continued to shrink in October, with a PMI print of 45.6, far below the level of 50 needed for industry expansion and below expectations of 46.1.
Odds that the BOE has reached its rate ceiling are putting pressure on the Sterling. BOE Governor Andrew Bailey delivered a dovish speech on Tuesday, stressing that British inflation is expected to fall sharply. The BoE's Chief Economist Huw Pill also stated on Monday that UK inflation is likely to fall in the coming months, hinting that the BOE will not resume rate hikes. On Thursday, however, Pill, warned that BOE policy will need to remain restrictive for some time to bring inflation down.
Markets are pricing in more than a 50% chance of rates being unchanged until June 2024. On the other hand, interest rates are expected to remain at their current 15-year high for a long time, with markets predicting a rate cut in August next year.
The BOE maintained its official rate at 5.25% at its latest meeting, which was in line with expectations. The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down.
Recent fundamentals have shown 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 will be watching closely to see if further rate hikes are needed. Bailey has 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 surged last week, ending the week above the 151.5 level. The currency pair was driven mostly by the dollar’s boost by a hawkish pair. If the USD/JPY pair declines, it may find support near 148.8. If the pair climbs, it may find resistance at 151.9.
The minutes of the BOJ’s October meeting were released on Thursday and indicated that the central bank is gradually laying the groundwork for a policy pivot. According to the minutes, BOJ policymakers acknowledged that progress has been made towards sustainably achieving the bank’s 2% inflation target. The BOJ also raised the inflation outlook over the forecast period into the end of 2025.
The BOJ has so far maintained its dovish bias, putting more pressure on the Yen as other major central banks, and especially the Fed, have raised interest rates to high levels. Japanese authorities have been repeatedly warning speculators against excessive short selling of the Yen and have stepped in several times in the past year to provide support for the Yen.
The BOJ maintained its short-term interest rate target steady at -0.10% and that for the 10-year government bond yield around 0% set under its yield curve control, but redefined the 1.0% limit as a less restrictive ceiling rather than a rigid cap. Even though the BOJ tweaked its yield curve control policy slightly, markets were expecting a bigger shift in policy, and the Yen plummeted after the interest rate announcement.
On Monday, BOJ Governor Kazuo Ueda delivered a dovish speech, which sank the Yen further. Ueda stated that he doesn’t see an end to negative interest rates this year and vowed to maintain monetary easing to support economic activity.
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.
Gold prices were in a downtrend last week but shot up inexplicably on Thursday even after Fed Chair Powell’s hawkish speech boosted the dollar and raised rate hike expectations. Gold prices plummeted on Friday, however, after markets had time to catch up with the Fed’s hawkish stance, dropping to 1,938 per ounce. If gold prices increase, resistance may be encountered near $2,010 per ounce, while if gold prices decline, further support may be found near $1,900 per ounce.
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 started low last week, with the dollar index near the 104.9 level. The dollar rallied at the end of last week though, on hawkish Fed comments, with the dollar index climbing to the 105.8 level. US treasury yields fell at the beginning of last week but rebounded towards the end of the week, with the US 10-year bond dropping to 4.48% mid-week and then climbing back to 4.64%.
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. At the latest Fed meeting, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%.
Fed Chair Jerome Powell delivered a hawkish speech on Thursday, boosting the dollar and treasury yields. Powell stated that policymakers are not confident that they have achieved a sufficiently restrictive stance to return inflation to the Fed’s 2.0% target. Powell also warned that a sustainable drop in inflation is not guaranteed and hinted that stronger economic growth could warrant higher rates.
The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. 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. The crisis in Israel, however, so far remains contained and there seems to be little risk of spreading in the region. Market attention is moving away from the war in Gaza and safe haven demand is dropping, causing gold prices to drop.
Oil prices plummeted early last week, with WTI price touching the $75.0 per barrel level. Oil prices steadied on Thursday, after their selloff earlier in the week, and started to recover on Friday, with WTI price rising to $77.5 per barrel level on Friday. If WTI price declines, it may encounter further support near $75.0 per barrel, while resistance may be found near $84.0 per barrel.
A weak global economic outlook is driving down the oil demand outlook, putting pressure on oil prices. Last week mixed economic data from China raised concerns about future oil demand. On one hand, China’s crude oil imports rose in October. On the other hand, China’s overall exports fell more than expected, indicating slowing global 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. Russia and Saudi Arabia recently reaffirmed their commitment to maintain these voluntary supply cuts. Many market analysts even predict that the rate cuts will be extended into the first quarter of 2024. Oil prices, however, continued to decline, even on concerns of limited supply.
Oil prices have been supported by geopolitical risks within the past month. The crisis between Israel and Hamas continues, propping up oil prices. Especially fears of a potential Iranian involvement are buoying oil prices. Fears that the war in Israel would disrupt oil supply are easing, however, causing oil prices to slip. The crisis seems to be contained so far and risks of the war spreading in the region abate.
Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. FOMC members have voted to keep interest rates unchanged at a target range of 5.25% to 5.50%.
Powell delivered a hawkish speech on Thursday, stating that policymakers are not confident that they have achieved a sufficiently restrictive stance to return inflation to the Fed’s 2.0% target. Powell’s comments raised rate hike expectations, further restricting oil demand outlook and putting pressure on oil prices.
The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months. Even if the Fed has reached its interest rate ceiling though, rates are likely to stay high for longer, driving oil demand outlook and oil prices down.
Cryptocurrencies surged on Thursday on expectations that the Securities and Exchange Commission (SEC) will shortly grant spot Bitcoin exchange-traded funds (ETF) applications. BlackRock and other institutions have applied for a Bitcoin ETF, which would bring more institutional and retail money into crypto markets. The SEC has been hesitant regarding the future of Bitcoin ETFs, but it seems that the first batch of Bitcoin ETF applications will gain approval within the next few days and reportedly by November 17th. BlackRock also filed an ETH spot ETF on Thursday for approval by the SEC, causing Ethereum prices to surge.
Bitcoin price shot past the $37,000 barrier on Thursday, approaching $38,000, but deflated over the weekend, struggling to hold on to the key $37,000 level. If the BTC price declines, support can be found near $34,500, while resistance may be encountered near $40,000.
Ethereum price skyrocketed on Thursday, climbing past the key $2,000 level, and rising above $2,100. Ethereum slid to the $2,050 level on Friday and traded just above the $2,000 level over the weekend. If Ethereum's price declines, it may encounter support near $1,780, while if it increases, resistance may be encountered near $2,200.
Crypto markets benefitted from a risk on sentiment last week. Crypto markets have been under pressure in the last month as the war between Israel and Hamas soured risk sentiment. The conflict in the Gaza area continues, but the risk of the crisis spreading to the region has decreased and risk sentiment is renewed.
Increases in central banks’ interest rates are putting pressure on risk assets. Most major central banks, however, are hitting pause on rate hikes, propping up crypto markets. FOMC members have voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. The Fed’s decision to pause rate hikes has increased risk appetite, boosting cryptocurrencies, especially since markets anticipate that the Fed has reached its rate ceiling.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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