Important calendar events
The dollar skyrocketed early last week, with the dollar index reaching a yearly high of 107.3. Rising US yields and increased rate hike expectations have been bolstering the dollar. The dollar, however, had been trading in overbought territory and dipped towards the end of the week, closing near 106.1 on Friday. US bond yields also started strong last week, with the US 10-year bond yield climbing to a 16-year high of 4.86%. Bond yields dipped to 4.71% mid-week but surged again on Friday, closing near 4.81%.
US Labor data last week were mixed overall, causing volatility in the price of the dollar. US employers expanded their workforce in September, with Non-Farm Payrolls increasing by 336K from 227K in August. US hiring rose unexpectedly, beating estimates of 171K new jobs. US JOLTS Job Openings data exceeded expectations, but this indicator measured job openings in August. US employers opened 9.61M new jobs in August up from 8.92M in July against expectations of 8.81M.
Wage growth slowed, however, with Average Hourly Earnings increasing by only 0.2% in September against the 0.3% expected. Hourly earnings grew by 4.2% year-on-year in September dropping from 4.3% in August. This is a strong inflation gauge, indicating that inflationary pressures in the US are cooling.
The unemployment rate held steady at 3.8% in September versus the 3.7% estimated. Unemployment Claims ticked up last week, rising to 207K for the week ending September 28th from 205K the week before. ADP Non-Farm Employment Change, which shows the estimated change in the number of employed people, dropped sharply to 89K in September from 180K in August against expectations of 154K.
The US Services sector continued to expand according to PMI data released last week. The ISM Services PMI index dropped to 53.6 in September from 54.5 in August. A print above 50, however, denotes industry expansion, although the lower value in September indicates expansion at a slower pace.
US manufacturing data last week were also robust boosting the dollar. The ISM Manufacturing PMI index rose to 49.0 in September from 47.6 in August, exceeding expectations of a 47.8 print. US Final Manufacturing PMI also rose to 49.8 in September from 48.9 in August. Both indices remained below the 50 level, indicating that the US manufacturing sector is still in contractionary territory, but the industry is contracting at a slower pace.
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 that does not necessarily mean it has reached its rate ceiling. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven.
Core PCE Price Index rose 0.1% month-on-month in August against predictions of 0.2% growth and 0.2% in July. Core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July. This is the Fed’s preferred inflation gauge and a lower-than-expected print indicated that price pressures in the US are easing. Market odds in favor of a pause in rate hikes in November rose above 80% after the release of the PCE index.
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.
Final GDP data for the second quarter of 2023 showed that the US economy expanded by only 2.1% in Q2 of 2023 against expectations of 2.2% growth. The final GDP price index for the 2nd quarter of the year also came in below expectations at 1.7% versus 2.0% anticipated.
Several FOMC members are due to deliver speeches this week, which may affect the dollar. Fed rhetoric will be one of the main drivers of the dollar in the next few weeks as the dollar’s direction greatly depends on the Fed’s policy outlook.
Key US inflation data are scheduled to be released this week and are likely to cause volatility in the price of the dollar. PPI data on the 11th and especially CPI data on the 12th are the most highly-anticipated fundamentals this week. The Fed’s future monetary policy will depend mainly on the US inflation outlook.
The EUR/USD rate was driven primarily by the dollar’s movement last week. EUR/USD exhibited high volatility last week, plummeting from the 1.058 level to 1.044 early in the week, then paring losses towards the end of the week and reclaiming the 1.58 level on Friday. If the EUR/USD pair declines, it may find support at 1.044, while resistance may be encountered near 1.061.
Eurozone fundamentals released last week for the Euro area were mainly optimistic, providing support for the Euro. German Trade Balance rose to 16.6B in August from 16.0B in July, indicating increased value of exported versus imported goods. French Industrial Production contracted by 0.3% in August but did not reach the 0.4% contraction predicted.
The Services and Manufacturing sectors in the Euro area remain in contractionary territory indicating diminishing growth in a weak economic backdrop. Services PMI data released last week for some of the Eurozone’s leading economies and for the entire Euro area were slightly optimistic, however. The Final Services PMI index rose to 48.7 in September from 48.4 in August. The services index remained below the threshold of 50 which would indicate industry expansion. The services sector remains in contractionary territory but the increased print shows that contraction is slowing down.
The final Manufacturing PMI in September remained at 43.4 as predicted. The manufacturing sector in the EU remains in contractionary territory as September’s print came in below the threshold of 50 required for industry expansion. Unemployment in the EU remained at high levels in August, with a 6.4% print as expected, only marginally down from 6.5% in July.
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.
The ECB raised interest rates by 25 bp at its September monetary policy meeting, bringing its main refinancing rate to 4.50%. The ECB had the difficult task of assessing the risk to the fragile Eurozone economy against high inflation rates. In the end, persistently high inflation induced the central bank to raise interest rates again on Thursday.
The ECB hinted that it had reached its interest rate ceiling, putting pressure on the Euro. ECB President Christine Lagarde signaled an end to rate hikes at the press conference after the conclusion of the meeting but warned that interest rates will remain at sufficiently restrictive levels for as long as necessary.
Final GDP data for the Euro area were disappointing, showing 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 exhibited high volatility last week. The currency rate dipped to the 1.203 level mid-week but rallied towards the end of the week, climbing to 1.223 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.227, while support may be found near 1.200.
On the data front, UK Construction PMI data released last week fell short of expectations, putting pressure on the Sterling. The Construction sector fell deep into contractionary territory in September, with a print significantly below the threshold of 50 that denotes industry expansion. Construction PMI dropped to 45.0 in September from 50.8 in August against expectations of 50.0. The BOE’s high-interest rates are responsible for an increase in UK mortgages, strangling the British housing sector.
In addition, the manufacturing sector in the UK continued to contract sharply, as shown by Manufacturing PMI data released last week. The indicator rose only marginally to 44.3 in September from 44.2 in August. A print below 50 denotes industry contraction although the slightly higher reading shows that the sector is shrinking at a slower pace.
UK Final Services PMI data last week exceeded expectations though, boosting the Sterling. The Final Services PMI index rose to 49.3 in September from 47.2 in August, against expectations of a 47.2 print. The PMI index remained below the 50 level, indicating that the sector is still in contractionary territory. The unexpected improvement in the PMI data, however, showed that the contraction in the services sector is slowing down.
MPC member Catherine Mann delivered a hawkish speech last week, hinting that the BOE may not stop raising interest rates yet. The BOE’s hawkish stance has provided support for the Sterling this week.
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 also signaled that it had reached its peak interest rate.
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.
Inflationary pressures in the UK are finally receding and likely tipped the balance in favor of a pause in rate hikes. British Inflation cooled more than expected in August, demonstrating the effectiveness of the BOE’s consistently hawkish policy. Headline inflation dropped to 6.7% year-on-year in August from 6.8% in July against expectations of 7.0%.
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 state of the British economy remains fragile, as prolonged tightening has taken its toll on the labor market and other vital economic sectors.
The British economy expanded at a higher pace than anticipated in the second quarter of 2023. A positive GDP report indicated that the economic outlook for the UK has improved and has alleviated recession fears.
Final GDP data showed that the British economy grew faster than anticipated, expanding by 0.3% in the first three months of this year, up from the 0.1% previously estimated. Final GDP data for the second quarter of the year indicated a 0.2% expansion, as expected. More importantly, the UK's economy has grown by 1.8% since the pandemic started, beating the previous estimate of a 0.2% contraction.
UK monthly GDP data are scheduled to be released on the 12th. GDP data are of primary importance considering that the fragile state of the British economy is likely to affect the BOE’s future decisions.
BOE Governor Andrew Bailey will deliver speeches this week on the 13th and the 14th. Bailey’s statements will be scrutinized by traders for hints into the BOE’s monetary policy direction.
USD/JPY rose briefly above the key 150 level early last week. The currency pair then plummeted sharply, dropping as low as 147, at what many analysts consider was another intervention to bolster the Yen. The massive drop in the USD/JPY raised speculation about government involvement, although Japanese officials have not yet confirmed an intervention to support the Yen.
The Yen continued to drop sharply towards the end of the week despite the Japanese government’s intervention. The dollar’s decline towards the end of the week was not sufficient to offset the Yen’s plunge and the currency pair climbed back to 149.5 at the end of the week. If the USD/JPY pair declines, it may find support near 147.3. If the pair climbs, it may find resistance at 150.
Many market analysts view the USD/JPY 150 level as the line in the sand for an intervention. Indeed, as soon as the currency rate touched the 150 level on Tuesday, it registered a phenomenal drop. Government officials have not confirmed that the Yen’s extreme upward movement was the result of an intervention. Japan's top currency diplomat, Masato Kanda, said he would not comment on whether Tokyo intervened in the exchange rate market. Market volatility later in the week was subdued and USD/JPY remained much lower from the 150 key level as investors were concerned about a fresh intervention.
The Yen has been weakening, pushed down by the BOJ’s ultra-accommodating monetary policy. The Yen’s weakness has been a subject of concern for Japanese authorities as it undermines the country’s importing potential and causes financial distress in households.
Japanese authorities have been repeatedly warning speculators against excessive short-selling of the Yen. The Yen’s continued weakness is raising market awareness of another intervention by the Japanese government to support the ailing currency. Finance Minister Shunichi Suzuki stated on Monday that the government is closely watching FX moves with a strong sense of urgency.
Japanese authorities have stepped in before to provide support for 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. The Yen becomes even more vulnerable as other major central banks continue raising interest rates and the monetary policy divergence between the Fed and the BOJ becomes more pronounced.
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 minutes of the BOJ’s September meeting were released on Monday. The minutes showed that policymakers discussed the complications of a potential exit from negative interest rates, stressing that various factors must be considered when shifting their 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 3.1% in July from 3.3% in June. Inflation in Japan has remained above the BOJ’s 2% target for more than a year, encouraging the BOJ to tighten its monetary policy. BOJ Core CPI climbed to 3.3% on an annual level in August beating expectations of 3.2%.
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 dropped last week for the second week in a row. Gold prices dropped below $1,810 per ounce mid-week as the US dollar and yields surged. Gold’s slide was arrested towards the end of the week though, rising to the $1,830 per ounce level on Friday as the dollar weakened. If gold prices increase, resistance may be encountered near $1,930 per ounce, while if gold prices decline, further support may be found near $1,800 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 skyrocketed early last week, with the dollar index reaching a yearly high of 107.3. Rising US yields and increased rate hike expectations have been bolstering the dollar. The dollar, however, had been trading in overbought territory and dipped towards the end of the week, closing near 106.1 on Friday. US bond yields also started strong last week, with the US 10-year bond yield climbing to a 16-year high of 4.86%. Bond yields dipped to 4.71% mid-week but surged again on Friday, closing near 4.81%.
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. FOMC members voted last week to keep interest rates unchanged at a target range of 5.25% to 5.50%.
The Federal Reserve decided to pause rate hikes at its latest meeting, but that does not necessarily mean it has reached its rate ceiling. The Fed is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are tumbling since gold presents a less attractive option as an investment than interest-yielding treasury bonds.
Core PCE Price Index, the Fed’s preferred inflation gauge, dropped to 3.9% year-on-year from 4.3% in July, increasing the odds of a pause in rate hikes in November. Headline inflation came in hotter than anticipated though, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Inflationary pressures in the US remain high, despite the Fed’s high interest rates.
Oil prices dipped early last week as investors saw a chance to profit from the recent high oil prices. Traders took profits on Monday concerned about a correction in the overly high oil prices of the past few days. Oil prices rallied mid-week but plummeted towards the end of the week, weighed down by demand concerns. WTI price started strong last week, above the $92.0 level, but decreased dramatically during the week, dropping to $82.5 per barrel by Friday. If WTI price declines, it may encounter support near $80.0 per barrel, while resistance may be found near $95.3 per barrel.
The U.S. Energy Information Administration reported a drop in US gasoline demand, putting pressure on oil prices. Macroeconomic data last week indicated that global economic growth is declining, driving the oil demand outlook down. The US Services sector is slowing down, and the US labor market is weakening. The diminishing demand outlook has offset supply concerns and oil prices dropped sharply.
The OPEC+ organization meeting on Wednesday went off without any surprises. The producer group kept its output policy unchanged, maintaining its recent cuts by Russia and Saudi Arabia, which have already been extended till the end of the year. Market fears about fresh production cuts failed to materialize and oil prices plummeted.
Supply concerns have been boosting oil prices. Russian authorities have decided to restrict diesel and gasoline exports to stabilize domestic fuel prices. Russia, however, eventually decided to relax the fuel ban, assuaging supply concerns. Russia initially lifted restrictions on certain fuel types, specifically fuel used as bunkering for some vessels and diesel with high Sulphur content. Last week Russia partially relaxed the fuel ban once again, allowing seaborne diesel exports.
U.S. crude oil inventories dropped by 2.2M barrels in the week to September 29th exceeding expectations of a small 0.1M barrel drop, according to data released by the Energy Information Administration.
A strong US dollar and high-interest rates also keep oil prices in check. The oil demand outlook has declined as the Fed has hinted at further tightening. The Fed decided to pause rate hikes at its September policy meeting, but that does not necessarily mean it has reached its rate ceiling. Even if the Fed has reached its interest rate ceiling, rates are likely to stay high for longer, driving oil demand outlook and oil prices down.
Deterioration in China’s economic outlook is also keeping oil prices down. Uncertainty over China’s economic recovery has put a cap on oil prices. China is the world’s largest importer and a weaker Chinese oil demand outlook has put pressure on oil prices. The World Bank on Monday forecast China’s growth for 2023 at 5.1%, up from 3% in 2022 but still representing a slowing growth pace since April.
Crypto markets exhibited high volatility last week as bulls and bears fought for market control, without either side managing to form a clear trend though. Cryptocurrencies plummeted early in the week, but their fall was arrested later in the week.
Bitcoin price retreated mid-week, touching the $27,200 level but recovered a little later in the week, approaching the key $28,000 level over the weekend. If BTC price declines, support can be found near $26,700, while resistance may be encountered near $28,500.
Ethereum price plunged last week, dropping below the $1,600 level. Ethereum pared some of its losses later in the week, trading around the $1,640 level during the weekend If Ethereum price declines, it may encounter support near $1,560, while if it increases, resistance may be encountered near $1,740.
The first Ethereum-focused exchange-traded funds were launched last week, giving individual investors access to Ethereum. The market’s response to the ETH-ETF launch was lukewarm though, with low volumes reported.
The Securities and Exchange Commission (SEC) has been hesitating in deciding regarding the future of Bitcoin ETFs, however. BlackRock and other institutions have applied for a Bitcoin ETF, which would bring more institutional and retail money into crypto markets. SEC however has delayed its decision on Bitcoin ETFs putting pressure on Bitcoin price.
Low-risk sentiment in the past week has been putting pressure on crypto markets. Global economic concerns have soured risk sentiment as prolonged economic tightening restricts economic growth.
Expectations of further economic tightening have dragged risk sentiment down, putting strain on cryptocurrencies. The Fed kept interest rates stable at its September policy meeting, but that does not necessarily mean it has reached its rate ceiling. Market odds of another rate hike within the year are high, and interest rates are likely to stay in restrictive territory for a longer period, hindering economic growth. Increases in central banks’ interest rates sour risk sentiment, driving risk assets down.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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