Important calendar events
The dollar continued to rise on Thursday, and the index surged from 106.5 to 107.0, its highest value since October 2022. US treasury yields on the other hand declined, with the US 10-year bond yield dropping from 4.46% to 4.40%.
The dollar added more gains on Thursday as Republicans secured full control of the US Government, allowing Trump’s administration to pass laws more easily. After winning the US Presidency last week and the majority in the US Senate earlier this week, Republicans won control over the House of Representatives on Thursday.
Trump can pursue his agenda and 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 for longer.
The US Federal Reserve cut interest rates by 25 basis points last week 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. After the Fed policy meeting, Powell allayed fears that he would be forced to step down by Trump’s administration. Powell stressed that it is not permitted under the law for the US President to remove the Fed Chair, indicating that he intends to complete his term of office, until May 2026.
Odds of another rate cut in December shot up to 90% after the release of the US inflation report on Wednesday despite evidence that disinflation in the US is not progressing but dropped back to 75% on Thursday. Persistent price pressures may prevent the Federal Reserve from pivoting to a less restrictive monetary policy.
This was reflected on Fedspeak this week, which was rather hawkish. Fed officials speaking this week adopted a cautious stance towards future rate cuts, but this was not reflected in market rate cut expectations.
FOMC policymaker Lorie Logan warned on Wednesday, that price stability has not been achieved yet and that the Fed should move slowly with future rate cuts to avoid reaccelerating inflation. Fed member Robert Kaplan was also hawkish on Wednesday, expressing doubts about a rate cut in December. Fed’s Alberto Musalem, speaking after the release of the US inflation report on Wednesday, stated that the risk of inflation moving higher has risen and warned that interest rates should stay at restrictive levels while inflation remains above 2%.
Fed's Kashkari stated on Tuesday that he is confident that the battle with inflation would be won in the long run but stressed that it is too soon to declare victory on inflation. Fed Policymaker Tom Barkin was more hawkish, warning that US inflation might get stuck above the Fed's 2% target.
On the data front, 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 according to CPI data released on Wednesday. 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.
US Producer Price Index (PPI) data on Thursday, coming after Wednesday’s hot inflation print confirmed that inflationary pressures in the US are not decelerating. Producer Prices rose by 2.4% year-on-year in October up from 1.9% in September, which was revised upward and exceeding expectations of 2.3%. Monthly PPI rose by 0.2% in October, while September’s print was revised upward to reflect 0.1% from 0.0% previously. Core PPI, which excludes food and energy, rose by 0.3% in October, which was in line with expectations, against 0.2% growth in September.
Meanwhile, US Unemployment Claims for the week ending November 8 came in lower than expected on Thursday. Initial jobless claims dropped to 217K down from 221K the week before against market estimates of 223K.
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.
This week we expect to see increased volatility in the price of the dollar as key economic data are scheduled to be released. Retail Sales data coming up on Friday are strong indicators of economic activity.
EUR/USD dipped from 1.056 to 1.052 on Thursday, its lowest level since October 2023, as the dollar continued to gain strength. If the EUR/USD pair declines, it may find support at 1.043, while resistance may be encountered near 1.082.
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.
ECB’s Luis de Guindos stated on Thursday that Eurozone inflation is cooling towards the central bank’s 2% target and that policymakers are ready to respond accordingly. ECB member Olli Rehn also delivered a dovish speech on Tuesday, stating that if disinflation stays on track, the central bank may cut interest rates further. Rehn, however, also stated that he is waiting for December’s market data to form a clearer idea of the EU’s economic outlook.
Flash GDP data for the third quarter of the year released on Thursday tallied with Preliminary GDP estimates. 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.
EU Flash Employment Change on Thursday for the third quarter of 2024 came in at 0.2% as anticipated, bringing the annual Employment Change to 1.0%.
Economic activity data released on Tuesday for the Eurozone were underwhelming, putting pressure on the Euro. German ZEW Economic Sentiment dropped to 7.4 in November from 13.1 in October, missing expectations of 12.8. The Eurozone ZEW Economic Sentiment Index also worsened in November, dropping to 12.5 from October’s reading of 20.1, versus 20.5 anticipated. German Final CPI data released on Tuesday showed that German inflation rose by 0.4% in October, which was in line with expectations.
The Euro has been under pressure due to political turmoil in Germany, the Eurozone’s leading economy. German Chancellor Olaf Scholz 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.
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.
GBP/USD remained in a downtrend on Thursday, dropping from 1.270 to 1.265, its lowest level since July. If the GBP/USD rate goes up, it may encounter resistance near 1.304, while support may be found near 1.260.
BOE policymakers voted with a strong majority of 8-1 to cut rates to 4.75% last week. 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.
BOE Chief Economist Huw Pill stated on Tuesday that wage growth remains at elevated levels that are hard to reconcile with the central bank's inflation target of 2%. Pill stressed that there is still work to be done towards stabilizing price pressures in the UK. Pill emphasized that potential rate cuts would be gradual and hinted that interest rates may need to remain at restrictive levels for longer.
BoE’s Catherine Mann delivered a hawkish speech on Wednesday, warned that she doesn’t see inflationary risks subsiding yet, and hinted that the central bank may have cut interest rates prematurely. Mann was the only MPC member not to vote in favor of a rate cut last week and is known for her hawkish stance. Mann reiterated her determination to keep interest rates in restrictive territory in a speech on Thursday.
British labor data released on Tuesday were mixed overall. The British Unemployment Rate rose unexpectedly to 4.3% annually in September from 4.1% in August against a reading of 4.1% anticipated. Claimant Count Change data showed that the number of people claiming unemployment benefits rose to 26.7 K in October from just 10.1K in September versus 30.5 anticipated. The Average Earnings Index for the three months to September rose faster than expected, however, to 4.3% from 3.9% previously. Wage growth is a leading indicator of consumer inflation pointing to rising inflationary pressures.
Britain’s new Labour Government announced its first budget earlier this month, causing volatility in the price of the Sterling. 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.
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.
GDP data due on Friday are expected to show that the British economy expanded by 0.2% in September, maintaining a steady expansion rate. Preliminary GDP data are also due on Friday and are expected to show that the British economy expanded by 0.2% in the third quarter of the year.
USD/JPY continued moving in an upward trajectory on Thursday, rising from 155.4 to 156.3 as the dollar gained strength. If the USD/JPY pair declines, it may find support at 151.2. If the pair climbs, it may find resistance at 155.0.
USD/JPY rose above the 155.0 level on Wednesday for the first time since July, which is considered a line in the sand for another intervention in support of the Yen. The currency rate continued moving in an uptrend on Thursday, raising intervention concerns. Japan’s Finance Minister Katsunobu Kato warned markets last week that Japan’s government is prepared to respond to excessive Forex moves against the Yen. Kato stressed that the Japanese government would monitor closely the impact of Trump’s policies on Japan’s economy. Incoming US President Donald Trump has promised in his presidential campaign to raise import tariffs by 10%, which will affect Japan’s exports to the US.
Producer Price Index (PPI) data on Wednesday, showed that producer prices in Japan rose by 3.4% annually in October, exceeding expectations of 3.0%, while September’s print was revised upward to 3.1%. Monthly PPI rose by 0.2% in October from an upwardly revised reading of 0.3% in September, above expectations of 0.0%.
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.
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, boosting the Yen. 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.
The BOJ Summary of Opinions published on Monday showed that Japanese policymakers are divided over the timing of future rate cuts. According to the report, BOJ board members expressed diverging opinions on future rate cuts at the latest policy meeting in October. Some policymakers advised caution before moving forward with rate hikes, stressing the need to monitor market conditions, especially yen fluctuations.
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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Written by:
Myrsini Giannouli
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