Dollar quiet ahead of US CPI

Important Calendar Events

• EUR: French Final Private Payrolls, German Final CPI, Italian Industrial Production, German ZEW Economic Sentiment, ZEW Economic Sentiment
• GBP: Claimant Count Change, Average Earnings Index, Unemployment Rate, BOE Financial Stability Report, FPC Meeting Minutes, FPC Statement, BOE Governor Bailey Speech
• USD: Monthly CPI and Core CPI, Annual CPI

USD

The dollar traded with low volatility on Monday, ahead of Tuesday’s CPI data and Wednesday’s Fed meeting. The dollar index was near 105.1 at early trading then dipped to 104.7 during the day, before bouncing back to 105.2. US Treasury yields edged higher on increased rate hike expectations, with the US 10-year bond yielding above 3.6%.

The next US Fed monetary policy meeting is scheduled on Wednesday and traders are attempting to gauge the Fed’s intentions ahead of the meeting. A Fed blackout period started last Saturday and will last until the meeting, during which FOMC members do not deliver speeches that may reveal the central bank’s policy direction. The dollar maintained low volatility on Monday in the absence of significant economic indicators and Fed rhetoric. 

The US Federal Reserve voted to increase interest rates by 75 basis points at its last monetary policy meeting. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate in a range of 3.75% to 4.0%. Market expectations currently range between a 50-bps and a 25-bps interest rate increase this week, with odds in favor of a 25-bps rate hike. The FOMC statement and press conference released after the meeting might generate even more volatility than the interest rate announcement, as traders will be scrutinizing these for forward guidance.  

Market expectations of future rate hikes were considerably trimmed in the past few weeks on cooling US inflation. US headline inflation printed at 7.7% year-on-year in October, compared to 8.2% in September. On Friday however, US PPI data exceeded expectations, indicating that US inflation remains high. Monthly PPI rose by 0.3% in November, against expectations of a 0.2% growth, while data for October were revised to show a 0.3% increase, instead of the 0.2% previously reported.

The release of the CPI inflation indicators on Tuesday may cause high volatility in dollar prices ahead of the Fed meeting. Policymakers will rely largely on the most recent inflation print to decide how much they need to raise interest rates. 

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EUR 

The Euro traded sideways against the dollar on Monday, with the EUR/USD rate depending mostly on the dollar’s movement. EUR/USD climbed to 1.057 mid-day, before paring gains and dropping back to the 1.051 level. If the EUR/USD pair declines, it may find support at 1.042 and further down near 1.029. If the currency pair goes up, it may encounter resistance at 1.061.

This week the EUR/USD rate will be affected mainly by the Fed and the ECB interest rate decisions, on the 14th and the 15th respectively. In its last monetary policy meeting, the ECB raised its interest rate by 75 basis points to 1.5%, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. Market odds are currently in favor of a 50-bps rate hike this week, with the possibility of an even higher increase still on the table.

Traders await the ECB monetary policy meeting on the 15th, which is due a day after the much-anticipated Fed meeting. The ECB Monetary Policy Statement following the conclusion of the meeting might be of equal importance to the Euro as the announcement of the Main Refinancing Rate. 

Revised GDP for Q3 of 2022 exceeded expectations, with the Eurozone economy expanding by 0.3% versus the 0.2% predicted. The economic outlook for the Eurozone seems to be improving, providing the ECB with some leeway toward tightening its fiscal policy. Many analysts however are predicting stagnation later this year and in the first quarter of 2023. 

Eurozone headline inflation showed signs of cooling in November, after hitting an all-time high in October. Final Eurozone inflation dropped to 10.0% year-on-year in November from a record high of 10.6% in October, against expectations of a 10.4% print. 

Several economic activity indicators are due on Tuesday for the Eurozone and may affect the currency ahead of the ECB meeting, especially the ZEW Economic Sentiment indicators.

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GBP 

The Sterling traded sideways against the dollar on Monday and the GBP/USD rate oscillated around the 1.225 level with low volatility. If the GBP/USD rate goes up, it may encounter resistance at 1.234, while support may be found near 1.189 and further down near 1.176. 

The Sterling was supported by robust economic data on Monday. GDP for October showed a 0.5% expansion, versus a 0.4% expected and a 0.6% contraction in September. Improving the economic outlook may influence the BOE interest rate increase later in the week. The BOE however, has predicted that recession will hit the UK in 2023, with expansion not expected again till mid-2024. The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down.

Other economic activity indicators released on Monday for the UK also exceeded expectations, although their impact on the currency was muted as traders await the BOE and Fed meetings later in the week.

UK inflation hit a 41-year high in October, as annual CPI climbed to 11.1%, its highest value since 1981. October’s inflation exceeded September’s print of 10.1% and expectations of 10.7%. Inflation in the UK continues to rise, mainly due to the high cost of energy. Rising UK inflation is forcing the BOE to make some tough choices against a weak economic backdrop.

The next BOE monetary policy meeting is scheduled for this week on the 15th, a day after the Fed’s policy meeting. Traders will be paying close attention not only to the Official Bank Rate but also to the Monetary Policy Summary for hints into the BOE’s future policy. At their last monetary policy meeting, BOE members voted to increase interest rates by 75 bps. Currently, the BOE’s interest rate is at 3.0% and the difference with the Fed’s rate of 4.0% is putting pressure on the Sterling. Market odds are currently in favor of a 50-bps rate hike this week, as the BOE is aiming to tackle soaring UK inflation rates. 

Several important economic data are scheduled to be released on Tuesday for the UK, including Claimant Count Change, Average Earnings Index, and Unemployment Rate. In addition, BOE Governor Andrew Bailey is due to deliver a speech on the Financial Stability Report on Tuesday and traders will scan his speech for hints into the BOE’s policy direction. 

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JPY

The Yen extended losses on Monday, with the USD/JPY pair touching the 138 level. If the USD/JPY pair declines, it may find support at 133.6. If the pair climbs, it may find resistance at 139.9 and further up at the psychological level of 142.2.

Economic activity indicators on Monday for Japan were overall mixed, failing to provide support for the currency. The BSI Manufacturing Index printed at -3.2 for the current quarter, against the 2.3 expected, with a negative value denoting pessimism in the future of the industry. Price pressures continue to rise in Japan, as annual PPI rose to 9.3% in November, versus the 8.8% predicted.

BOJ CPI for October rose to 2.7% on an annual basis, mainly due to the high cost of imported energy. National CPI rose by 3.6% year-on-year in October, against 3.0% in September, indicating that price pressures continue to rise in Japan. 

The final GDP Price Index for the third quarter of the year showed economic contraction by 0.3% on an annual basis and the final quarterly GDP for Q3 of 2022 printed at -0.2%. The Japanese economy shrank in the third quarter of 2022, mainly due to the high costs of imported energy. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. 

In its latest policy meeting, the BOJ left its monetary policy unchanged, as expected. 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 difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down. 

Several economic activities and health indicators are scheduled to be released this week for Japan, which is not expected to affect the Yen significantly. This week, the Yen is more likely to be affected by the dollar’s movement, as traders await the Fed monetary policy meeting on Wednesday.

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Written by:
Myrsini Giannouli

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