The dollar remains strong on robust US economic data

Important calendar events

• JPY: Monetary Policy Meeting Minutes
• EUR: German GfK Consumer Climate, ECB President Lagarde Speech
• GBP: MPC Member Cunliffe Speech
• USD: Goods Trade Balance, Preliminary Wholesale Inventories, Pending Home Sales, FOMC Member Bullard Speech, Fed Chair Powell Speech

USD

The dollar remained strong on Tuesday, supported by robust US economic data. The dollar index climbed above the 114 level, moving at 20-year highs. US Treasury yields soared, with the US 10-year bond yielding almost 4.0%, its highest value since 2007.  

Indicators of economic activity released on Tuesday were overall positive for the US economy. CB Consumer Confidence rose to 108.0 from 103.6 the previous month, exceeding expectations. New Home Sales climbed to 685K from 532K the previous month, when a drop in sales was predicted. FOMC member James Bullard delivered a hawkish speech on Tuesday, emphasizing the risks of increased inflation and minimizing recession concerns, stating that recessions fears should be more global than U.S. FOMC member Loretta Mester also delivered a hawkish speech on Monday, stating that further rate hikes are needed to bring rampant inflation under control.

This week, a risk-off sentiment has prevailed as recession fears grew, propping up the safe-haven dollar. The dollar had been boosted already by the hawkish outcome of last week’s Fed monetary policy meeting. The Fed’s stance has fuelled recession concerns boosting the haven dollar and pushing stock markets down.

The US Federal Reserve voted to raise its interest rate by 75 basis points last week to curb soaring US inflation rates. The US Central Bank has increased interest rates by a total of 300 basis points this year, bringing its benchmark interest rate from 2.50% to 3.25%. 

In a hawkish statement after the Fed meeting, US policymakers downgraded their GDP estimates, while revising upwards the inflation outlook. Inflation in the US is not cooling at the expected rate, putting pressure on the Fed to maintain its hawkish stance. CPI increased by 0.1% in August and Annual CPI through August increased by 8.3%, prompting the Fed to continue tightening its monetary policy. Federal Reserve Chair Jerome Powel has raised expectations of future rate hikes, stating that the Fed is determined to curb inflation even at the expense of economic growth. 

Several indicators of economic activity are scheduled to be released on Wednesday for the US and may affect the dollar in the wake of last week’s policy meeting. More importantly, FOMC member Bullard and Fed Chair Powell are due to deliver speeches on Wednesday, which are expected to cause some volatility in the currency.

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EUR

The Euro plummeted to multi-decade lows against the dollar this week, as the dollar gained strength. The EUR/USD pair continued trading below the strong parity level support and on Tuesday fell below the support at the 0.961 level. If the EUR/USD declines further it may find support near the 0.845 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at 1.019 and further up at 1.036. 

Global recession concerns are promoting a risk-off sentiment that is boosting the safe-haven dollar at the expense of competing currencies, such as the Euro. In addition, the results of the Italian elections on Sunday are weighing down the Euro. Right-wing politician Giorgia Meloni won the elections, causing skepticism and anxiety in the Eurozone.

The Euro had already retreated last week after a hawkish Fed policy meeting and statement boosted the dollar. The US Federal Reserve voted to raise its interest rate by 75 basis points, bringing its benchmark interest rate to 3.25%. In its latest monetary policy meeting, the ECB raised its benchmark interest rate by 75 basis points as well, but its interest rate is still only 0.75%, putting pressure on the Euro. 

Last week, Russian President Vladimir Putin renewed threats to halt energy exports and threatened western allies with nuclear action. A risk aversion sentiment prevailed, driving down riskier assets such as the Euro. Europe is facing an energy crisis driven by the EU’s dependency on Russian energy. High energy costs in the Eurozone are driving the Euro down, while inflationary pressures mount. 

Eurozone inflation hit a record high of 9.1% in August on an annual basis, as price pressures increased despite the fall in global fuel prices. Inflation in the EU is expected to rise even further in the following months, possibly reaching double digits, driven by the high cost of energy in the Eurozone. Increased price pressures are forcing the ECB to take swift action to tackle inflation. 

ECB President Christine Lagarde is due to deliver a speech on Wednesday, which is likely to cause some volatility in the Euro price.

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GBP 

The Sterling traded sideways against the dollar on Tuesday, with the GBP/USD rate fluctuating around the 1.072 level, after falling to an all-time low of 1.035 on Monday. If the GBP/USD rate goes up, it may encounter resistance near the 1.146 level and higher up near 1.173, while support may be found at the new all-time low of 1.035. 

BOE Chief Economist Huw Pill stated on Tuesday that the Central Bank was not indifferent to investors’ fears and hinted at a significant monetary policy response. However, he doused hopes of an intra-meeting rate rise, stating that the Bank cannot fine-tune short-term developments and pointing to the BOE’s monetary policy meeting in November for any changes in the BOE’s interest rate. 

The Sterling hit an all-time low on Monday, as recession concerns are weighing the currency down. The pound had already taken a beating last week after the BOE delivered a lower-than-expected rate hike. BOE Governor Andrew Bailey stepped in on Monday to provide some support for the currency by announcing that the BOE would not hesitate to change interest rates if needed. The announcement propped up the Sterling briefly and raised expectations of an emergency rate hike. As it became clear that there would be no emergency intervention, the pound started to retreat towards the new all-time low again.  

Last week, the new British Chancellor, Kwasi Kwarteng, announced a preliminary budget including substantial tax cuts and energy subsidies. The announcement of the budget was met with skepticism by markets, and the Sterling tumbled. The budget includes major tax cuts, which the British government will fund through borrowing at a time when the country is facing a debt crisis. On Monday, the Sterling collapsed nearing parity with the dollar, as markets pondered the implications for the economy of the new government’s first ‘mini-budget’. 

The Bank of England raised its interest rate by 50 bps last week, bringing the total interest rate to 2.25%. Markets were expecting a steeper rate hike, with odds favoring a 75-bp raise. The BOE has adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. In contrast, the Fed is ramping up efforts to combat US inflation by raising its interest rate by 75 basis points last week. 

UK economic outlook remains poor, with high inflation and rising recession concerns, although annual inflation in August dropped to 9.9% from 10.1% in July.  The BOE has warned that recession is expected to hit the UK in the fourth quarter of this year, and is forecasted to last for five quarters, until the end of 2024 with GDP falling to 2.1%. 

MPC Member Cunliffe is due to deliver a speech on Wednesday, which may affect the Sterling in light of recent developments. 

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JPY

The Yen continued to decline on Tuesday, with the USD/JPY rate moving closer to the 145 level resistance once again. The Yen’s weakness had prompted an intervention last week, as the currency pair had threatened to cross the 145 level. If the USD/JPY pair falls, support might be found near 141.5 and further down at 138.0. If the pair climbs, it may find further resistance at the 145 level and higher up at the 1998 high of 147.7. 

The Japanese government intervened to stem the Yen's weakness last week after it became clear that the BOJ would not move to support the currency. The Japanese Ministry of Finance intervened in the Foreign Exchange market for the first time since 1998, buying Yen for dollars. Japan's Vice Finance Minister for international affairs Masato Kanda stated that the government has taken decisive action to support the Yen, which had crossed the 145-mark with the dollar. The sudden move propelled the Yen upwards. This week though, the Yen retreated again, as the intervention provided only a temporary boost and further interventions seem unlikely.

BOJ Governor Haruhiko Kuroda made a speech in support of Japan’s recent bond-buying program on Monday, defending the intervention. Markets, however, seemed unfazed by Kuroda’s support, especially as the BOJ does not seem to have any intention to act in support of the Yen, and the currency continued to slide. 

In its monetary policy meeting last week, the BOJ maintained its ultra-easy monetary policy, keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The BOJ also kept the target for the 10-year bond yield at 0%. The BOJ keeps bond yields low, weakening the Yen. BOJ Governor Haruhiko Kuroda re-affirmed the BOJ’s commitment to maintaining economic stimulus, stating that the Bank would provide further easing if necessary and was prepared to maintain its dovish stance for a long time.

The difference in interest rates with other major Central Banks puts the Yen at a disadvantage, driving its price down. The US Federal Reserve voted to raise its interest rate by 75 basis points on Wednesday to curb soaring US inflation rates. While the Fed rate hike was in line with market expectations and had largely been priced in, the wide difference in interest rates is putting pressure on the Yen.

The Monetary Policy Meeting Minutes are scheduled to be released on Wednesday and may provide insight into the BOJ’s future policy direction.

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Written by:
Myrsini Giannouli

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