Important calendar events
The dollar slipped on Monday, with the dollar index dropping to the 106.1 level. US bond yields remained steady, with the US 10-year bond yielding approximately 4.89%.
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 dollar dipped on Monday on reduced rate hike expectations, not only this week but for the remainder of the year. In September’s monetary policy meeting, FOMC members voted to keep interest rates unchanged at a target range of 5.25% to 5.50%.
This week all eyes are going to be on the Fed monetary policy meeting on November 1st. Markets widely expect the Fed to hold rates steady this week, after FOMC members’ dovish comments in the past couple of weeks. Fed Chair Jerome Powell’s speech after the conclusion of the meeting is going to attract the attention of traders. A pause in rate hikes this week is almost considered a given and has already been priced in, and market participants will focus mostly on the Fed’s forward guidance.
Markets anticipate that Fed rates will remain the same this year, with an approximately 95% probability of a pause at this 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. Still, the possibility of another increase in interest rates cannot be completely discounted and is likely to affect the dollar in the coming weeks. The Fed may decide to pause rate hikes completely, but interest rates are likely to remain in restrictive territory for longer.
The US economy seems to be 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%.
The Euro benefitted from the dollar’s weakness on Monday and EUR/USD was catapulted to the 1.061 level. If the EUR/USD pair declines, it may find support at 1.052, while resistance may be encountered near 1.069.
Preliminary GDP data for Germany on Monday showed that the Eurozone’s leading economy is entering a recession. Preliminary GDP for the third quarter of the year showed that the German economy contracted by 0.1%, compared to stagnation in the previous quarter. Market estimates, however, were even more grim, predicting a 0.2% contraction in Q3 of 2023. Preliminary German CPI estimates for Germany were favorable though, with inflation in October remaining steady, against predictions of a 0.2% raise. Flash CPI data for Spain on Monday also showed that inflationary pressures are receding. Headline inflation rose by 3.5% year-on-year in October, against estimates of a 3.8% print.
The ECB policy rate announcement last week 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.
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.
The Sterling gained strength on Monday as the rivaling dollar declined, and GBP/USD rose to 1.216. If the GBP/USD rate goes up, it may encounter resistance near 1.228, while support may be found near 1.206.
On the data front, economic activity data released on Monday for the UK were disappointing, putting pressure on the Sterling. M4 Money Supply, which shows the change in the total quantity of domestic currency in circulation and deposited in banks, fell short of expectations. September’s print indicated a drop of 1.1%, versus a growth of 0.2% in August and expectations of a 0.1% growth. The number of Mortgage Approvals dropped to 43K in September from 45K in August, indicating that the housing sector in the UK is shrinking. Net Lending to Individuals, which is correlated with consumer spending and confidence, also declined in September, dropping sharply to 0.5B from 2.8B in August and against expectations of 2.4 B.
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.
The BOE will announce its official rate at the end of its monetary policy meeting this week on November 2nd, a day after the Fed interest rate announcement. Market analysts are predicting that the BOE will hold interest rates steady this month. Traders will focus mainly on the Monetary Policy Summary, as well as on BOE Governor Andrew Bailey’s speech after the meeting. The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down.
Last 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 will 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.
The Yen gained strength on Monday, ahead of Tuesday’s BOJ interest rate decision. The USD/JPY rate was also pushed by the dollar’s weakness, plummeting to the 149.1 level. 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.
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. 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.
The BOJ is meeting again this week and will announce its rate decision on Tuesday. A pivot in the BOJ’s policy is not likely yet, and traders will focus mostly on the BOJ’s forward guidance for hints of a future shift in the central bank’s policy. However, there is speculation that the BOJ could tweak its yield curve control policy this week, amid rising global yields and inflation in Japan. Market odds of a BOJ rate hike in January, however, have increased above 60%. BOJ Governor Kazuo Ueda has hinted that a policy shift may finally be on the horizon.
Last week the USD/JPY rate rose above the key 150 level, which is considered as a line in the sand for a government intervention in favor of the Yen. Even though the currency rate remained above the key 150 level for a few days, the Japanese government did not intervene to bring the currency rate down this time. The Japanese government likely refrained from intervening partly because the high USD/JPY rate was driven mostly by the dollar’s surge rather than speculative moves against the Yen.
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. 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 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.
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
presença na indústria como Provedor de Liquidez
e execução confiável
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suporte ao cliente
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