Important calendar events
The dollar plummeted after last week’s Fed rate decision, with the dollar index dropping from the 107.0 to the 106.2 level. US bond yields also dropped sharply, with the US 10-year bond yield dropping from 4.93% to 4.52%.
On Wednesday, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. A pause in rate hikes was widely anticipated, however, and had already been priced in by markets.
Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones, however, boosting the dollar. Powell admitted that the full effect of tightening is yet to be felt and although it is putting pressure on economic activity, the Fed’s hawkish policy is bringing inflation down. However, he stated that the Fed is still not confident that the current interest rates will be restrictive enough to achieve the central bank’s 2% inflation goal and warned that another rate hike in December is not out of the table. The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months.
Markets, however, were not convinced that the Fed intends to resume its tightening cycle. Odds of a rate hike in December were approximately 20% before last week's meeting and have now dropped to less than 5%.
Powell was careful not to communicate an end to rate hikes too early. The Fed relies on high treasury yields to complement its firming policy. If the Fed signals that it has reached its rate ceiling, markets may start pricing in rate cuts, driving yields down. This will, in turn, force the Fed to step in and increase rates again. The Fed may decide to end rate hikes completely, but interest rates are likely to remain in restrictive territory for longer.
On the data front, US employment data last week were mixed. Non-farm payrolls last week, which reflect the change in the number of employed people, showed a lower number of jobs created than expected. Non-farm payroll data for October came in at 150K versus 180K expected and 297K in September. The US unemployment rate rose slightly from 3.8% in September to 3.9% in October. Wage growth also fell short of expectations, rising by only 0.2% in October versus 0.3% expected.
ADP Non-Farm Employment Change, which reflects the change in the number of employed people, grew by 113K in October from 89K in September but fell short of expectations of a 149K growth. JOLTS Job Openings, on the other hand, showed that US employers added 9.55M new jobs in September versus 9.60M in August, exceeding expectations of 9.34M openings.
US Manufacturing data last week were disappointing, putting pressure on the dollar. ISM Manufacturing PMI dropped further into contractionary territory in October, with a 46.7 point from 49.0 in September. A value below 50 indicates industry contraction and the lower value in October shows that the sector is shrinking more rapidly than before. ISM Manufacturing Prices, a leading indicator of consumer inflation, also dropped below expectations in October, indicating that price pressures in the US are cooling.
CB Consumer Confidence, on the other hand, exceeded expectations with a print of 102.6 in October, which was nevertheless lower than September’s revised 104.3 print. The Employment Cost Index, which reflects the change in the price businesses and the government pay for civilian labor, rose by 1.1% in the third quarter of the year, beating estimates of a 1.0% growth.
The US economy is 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 decline last week and EUR/USD ended the week near the 1.073 level. If the EUR/USD pair declines, it may find support at 1.052, while resistance may be encountered near 1.076.
Economic activity data released last week for the Eurozone were disappointing, putting pressure on the Euro. Manufacturing PMI data released last week for some of the Eurozone’s leading economies and for the EU as a whole were disappointing. The manufacturing sector in the EU is ailing, as confirmed by Thursday’s data. Manufacturing PMI for the Euro area in October remained at 43.1, with a print below 50 denoting industry contraction. The manufacturing sector is shrinking rapidly, highlighting the fragile state of the EU economy.
Preliminary GDP data for Germany last week 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 economic outlook of the Eurozone appears to be deteriorating, putting pressure on the Euro. Preliminary GDP data for the Euro area showed that the Eurozone economy contracted by 0.1% in the third quarter of the year against expectations of stagnation. The Eurozone economy barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1 of 2023. The EU economy is struggling and cannot withstand much further tightening.
Headline inflation in the Eurozone fell to its lowest level in two years in October, mainly due to a drop in energy prices. Flash CPI cooled to 2.9% year-on-year in October from 4.3% in September against expectations of a 3.1% print. Core CPI Flash Estimate, which excludes food and energy, was in line with expectations. Core CPI eased to 4.2% year-on-year in October from 4.5% in September. The ECB’s efforts to curb inflation rates are paying off, even at the cost of decreased economic growth.
The ECB decided to keep interest rates unchanged at 4.50% in October. The pause in rate hikes was widely anticipated and 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 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.
The Sterling soared last week after the BOE’s monetary policy decision and the GBP/USD rate was further boosted by the dollar’s decline, with the currency rate touching 1.238 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.250, while support may be found near 1.206.
The BOE maintained its official rate at 5.25% on Thursday, which was in line with expectations. The BOE’s decision to keep interest rates the same was not unanimous though, with 6 MPC members voting to keep interest rates the same and 3 members voting in favor of a 25bp rate hike. MPC members had also voted in favor of a pause in rate hikes in September, but only two members had voted in favor of a rate hike then.
The BOE has likely reached its rate ceiling but will keep interest rates on hold for a long time to bring inflation down. Even though the BOE kept interest rates the same, Thursday’s voting was interpreted by markets as slightly hawkish, boosting the Sterling.
Recent fundamentals have shown 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.
On the data front, economic activity data released last week 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.
BOE Governor Andrew Bailey has stated that the central bank will be watching closely to see if further rate hikes are needed. Bailey has also emphasized that the BOE will hold 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 USD/JPY seesawed last week, with the currency rate surging at the beginning of the week, but paring gains towards the end of the week, and ending the week right where it started, near 149.5. The Yen plummeted on Tuesday after the BOJ monetary policy meeting and the USD/JPY rate skyrocketed to the 151.7 level, its highest value since October 2022. The USD/JPY rate later in the week and plummeted towards the end of the week as the dollar slipped. If the USD/JPY pair declines, it may find support near 148.8. If the pair climbs, it may find resistance at 151.9.
On Tuesday, the BOJ maintained its short-term interest rate target steady at -0.10% and that for the 10-year government bond yield around 0% set under its yield curve control, but redefined the 1.0% limit as a less restrictive ceiling rather than a rigid cap. Even though the BOJ tweaked its yield curve control policy slightly on Tuesday, markets were expecting a bigger shift in policy, and the Yen plummeted after the interest rate announcement.
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. BOJ Governor Kazuo Ueda had lately hinted that the Central Bank may finally pivot to a more restrictive policy but has so far failed to meet market expectations. Tuesday’s slight tweak in yield curve control was interpreted by markets as “too little, too late” and failed to appease investors.
In addition, Japanese Prime Minister Fumio Kishida is preparing to announce a 21.8 trillion Yen stimulus package to promote economic growth according to a report by Bloomberg. Further economic easing is likely to leave the Yen even more vulnerable.
Japanese authorities have been repeatedly warning speculators against excessive short selling of the Yen and have stepped in several times in the past year to provide support for the Yen. Market participants were concerned that another intervention may bring the currency rate down forcibly and were hesitant to bid excessively against the Yen.
On Tuesday, however, the Japanese Ministry of Finance finally admitted that it was not involved in the Yen’s recent surges, which were probably the result of trading algorithms. The news that the Japanese government did not move to support the Yen a few weeks ago made traders bolder on Tuesday, and the Yen collapsed to a yearly low.
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.
Gold prices traded sideways last week, oscillating around the $1,990 per ounce level. If gold prices increase, resistance may be encountered near $2,010 per ounce, while if gold prices decline, support may be found near $1,950 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 plummeted after last week’s Fed rate decision, with the dollar index dropping from the 107.0 to the 106.2 level. US bond yields also dropped sharply, with the US 10-year bond yield dropping from 4.93% to 4.52%.
Gold traded with low volatility last week and failed to capitalize on the rivaling dollar’s weakness. Gold prices show signs of having peaked and struggled to retain the previous week’s highs even after US treasury yields tanked.
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. On Wednesday, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. A pause in rate hikes was widely anticipated, however, and had already been priced in by markets, and the effect on gold prices was muted.
Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones, but markets are not convinced that the Fed intends to resume its tightening cycle. Market expectations that US interest rates have peaked are raising the comparative appeal of gold against the dollar as a safe-haven asset.
The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of safe-haven assets such as gold. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value.
Oil prices dipped last week, with WTI price dropping to the $81.5 per barrel level. If WTI price declines, it may encounter support near $77.6 per barrel, while resistance may be found near $91.0 per barrel.
Oil prices are kept in check by a strong US dollar and high-interest rates. Most major central banks, however, are hitting pause on rate hikes, boosting oil prices. The BOE voted to keep interest rates unchanged on Thursday. On Wednesday, FOMC members voted to keep interest rates unchanged at a target range of 5.25% to 5.50%.
Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones. The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months. Even if the Fed has reached its interest rate ceiling though, rates are likely to stay high for longer, driving oil demand outlook and oil prices down.
The Energy Information Administration announced on Wednesday that US crude oil inventories continued to rise. Oil inventories rose by 0.8M barrels in the week ending on October 29th, putting pressure on oil prices.
Oil prices have been supported by geopolitical risks in the past few weeks. The crisis between Israel and Hamas continues, propping up oil prices. Especially fears of a potential Iranian involvement are buoying oil prices. Last week, however, fears that the war in Israel would disrupt oil supply eased, and oil prices slipped. The crisis seems to be contained so far and risks of the war spreading in the region abate.
OPEC+ kept its output policy unchanged at its latest meeting, maintaining its recent cuts by Russia and Saudi Arabia, which have already been extended till the end of the year.
Cryptocurrency prices gained strength last week after the Fed announced that it would pause interest rates. The rally of cryptocurrencies was halted on Thursday, however, as many investors saw an opportunity to realize their gains and a bearish trend prevailed. Crypto markets started to recover towards the end of the week and pared losses over the weekend.
Bitcoin price edged a little higher last week but struggled to maintain the key $35,000 level over the weekend. If BTC price declines, support can be found near $33,400, while resistance may be encountered near $36,000.
Ethereum price surged last week, touching the $1,900 level over the weekend. If Ethereum's price declines, it may encounter support near $1,750, while if it increases, resistance may be encountered near $2,000.
FOMC members voted last week to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones, warning that another rate hike in December is not out of the table. The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months.
Increases in central banks’ interest rates are putting pressure on risk assets. The Fed’s decision to pause rate hikes last week increased risk appetite, boosting cryptocurrencies, especially since markets anticipate that the Fed has reached its rate ceiling.
Crypto markets remain under pressure as geopolitical events sour risk sentiment. The war between Israel and Hamas is driving cryptocurrency prices down. The conflict rages on in the Gaza area, causing market turmoil.
BTC/USD 1h Chart
ETH/USD 1h Chart
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Written by:
Myrsini Giannouli
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