Dollar dips as Trump trades lose momentum

Important calendar events

• EUR: Current Account, Final CPI, and Core CPI
• USD: Building Permits, Housing Starts

USD

The dollar surged last week, and the index rose to 107.0, its highest value since October 2022. However, the dollar dipped on Monday, and the dollar index dropped to 106.2. US treasury yields also edged lower, with the US 10-year bond yield falling from 4.46% to 4.42%.

The dollar surged last week as Republicans secured full control of the US Government, allowing Trump’s administration to 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 longer. The effects of Trump’s victory on markets are starting to fade this week, however, causing the dollar to decline. 

The US Federal Reserve cut interest rates by 25 basis points in November 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. Odds of another rate cut in December dropped to 60% this week from 90% the week before, providing support for the dollar. 

Persistent price pressures may prevent the Federal Reserve from pivoting to a less restrictive monetary policy. 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. 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.

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.

Key releases that may affect the dollar this week include US unemployment claims on Thursday, as well as Manufacturing and Services PMI data on Friday.

TRADE USD PAIRS

EUR 

EUR/USD had been in a downtrend for the past couple of weeks but rallied on Monday. The currency rate rose from 1.053 to 1.059 as the dollar dipped. If the EUR/USD pair declines, it may find support at 1.049, while resistance may be encountered near 1.079.

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 not committed to future rate cuts. Lagarde stressed that economic activity in the Eurozone is slowing down, prompting 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. 

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.

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. 

The Euro has been under pressure due to political turmoil in Germany, the Eurozone’s leading economy. German Chancellor Olaf Scholz has 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.

This coming week, important economic activity indicators for the Eurozone are scheduled to be released on Friday. Manufacturing and Services PMI data are due on Friday for some of the Euro area’s leading economies and for the EU as a whole, which may cause volatility in the price of the Euro. 

TRADE EUR PAIRS

GBP 

GBP/USD rose from 1.261 to 1.268 on Monday, as the dollar edged lower. If the GBP/USD rate goes up, it may encounter resistance near 1.297, while support may be found near 1.260.  

At the latest BOE policy meeting, MPC members voted with a strong majority of 8-1 to cut rates to 4.75%. 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. 

On the data front, GDP data showed that the British economy contracted by 0.1% % in September, falling short of expectations of 0.2% expansion. In addition, Preliminary GDP data for the third quarter of the year showed that the British economy expanded by just 0.1% against expectations of 0.2% expansion. In addition, GDP data for the second quarter of 2024 were revised downward to reflect 0.5% growth against initial estimates of 0.6%. 

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. 

This coming week the British Monetary Policy Report Hearings on Tuesday are expected to attract market attention and may create volatility in the price of the Sterling. During these hearings, the BOE Governor and MPC members testify on inflation and the economic outlook before the Parliament's Treasury Committee.

In addition, headline inflation data are due on Wednesday and analysts anticipate an uptick in British inflation in October, which may prevent the BOE from cutting interest rates further. 

TRADE GBP PAIRS

JPY

USD/JPY rose to 155.4 in early trading on Monday but dropped below the key to 155.0 level later in the day as the dollar declined. USD/JPY has been trading close to the 155.0 level, which is considered a line in the sand for another intervention in support of the Yen. If the USD/JPY pair declines, it may find support at 152.3. If the pair climbs, it may find resistance at 156.8. 

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. 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. 

Ueda delivered another hawkish speech on Monday, boosting the Yen. Ueda said that keeping interest rates low for too long could cause inflation to spike uncontrollably, forcing the BOJ to raise interest rates aggressively. Ueda, however, did not provide a specific timeline for rate hikes and markets doubted that the central bank could raise interest rates soon, causing the Yen to deflate. 

On the data front, Japan’s economy expanded by 0.2% in the third quarter of the year, down from 0.7% in the second quarter. The Japanese economy has started to expand, after shrinking by 0.5% in the first quarter of the year. 

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.

TRADE JPY PAIRS

The content provided in this material and/or any other material that this content is referred to, whether it comes from a third party or not, is for information purposes only and shall not be considered as a recommendation and/or investment advice and/or investment research and/or suggestions for performing any actions with financial products or instruments, or to participate in any particular trading strategy and cannot guarantee any profits. Past performance does not constitute a reliable indicator of future results. TopFX does not represent that the material provided here is accurate, current, or complete and therefore shouldn't be relied upon as such. This material does not take into account the reader's financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of TopFX, no reproduction or redistribution of the information provided herein is permitted.

Written by:
Myrsini Giannouli

Share the article: