Dollar Rises as Inflation Data Halts, Fueling Rate Cut Bets: On Thursday, September 12, the U.S. dollar traded near its highest level in four weeks against the euro,
as signs of stability in U.S. inflation boosted expectations
that the Federal Reserve will avoid a significant rate cut next week.
Meanwhile, the European Central Bank (ECB) is widely expected
to cut interest rates by a quarter of a percentage point later today,
and investors are looking for hints on how close another rate cut might be.
The dollar rose against the yen following a volatile session yesterday.
The U.S. currency dropped by about 1.24% to its lowest level
this year before recovering all its losses after the release of consumer price data.
Early on Wednesday, Junko Nakagawa, a Bank of Japan’s Board of Directors member,
confirmed the bank’s bias toward tightening monetary policy, stating that low real interest rates leave room for further hikes.
Her colleague on the board, Naoki Tamura, said today,
Thursday, that the pace of expected monetary policy tightening in the market might be slower than necessary,
comments that helped ease the yen’s losses.
The dollar rose 0.31% to 142.805 yen after climbing earlier by about 0.41%.
In the previous session, following Nakagawa’s comments, it had fallen to 140.71 yen for the first time since December 28.
The U.S. Consumer Price Index (CPI) rose 0.2% last month, matching the gain seen in July.
Excluding volatile food and energy components, the index rose 0.3%, following a 0.2% increase in the previous month.
As a result, traders have essentially ruled out the possibility of a 50 basis point rate cut on September 18,
leaving the probability at 15%, compared to an 85% chance of a 25 basis point cut.
For the ECB, markets are 100% certain of a quarter-point rate cut today,
as a group of policymakers supports another reduction following a quarter-point cut in June.
The euro stabilized at $1.10165, remaining close to the low,
which reached $1.1002 on Wednesday, its weakest since August 16.
Dollar Rises as Inflation Data Halts, Fueling Rate Cut Bets
The People’s Bank of China Lowers Prime Lending Rates and Impacts the Global Financial Landscape: In a significant development affecting the global financial scene,
the People’s Bank of China has taken an unexpected step by reducing its prime lending rates.
This move comes amid ongoing efforts to stimulate economic growth and support the debt-laden real estate sector.
Additionally, in the United States, President Joe Biden’s announcement of his withdrawal
from the presidential race has shaken the political arena, leading to a slight decline in the US dollar.
This article delves into these major financial events and their potential implications on the global economy.
The People’s Bank of China Defies Expectations and Lowers Prime Lending Rates
Early Monday morning, the People’s Bank of China, led by Governor Pan Gongsheng,
announced a prime lending rate reduction (LPR) reduction.
This move continues the bank’s direct support for mortgage interest rates,
which is intended to revive demand in the debt-laden sector and support economic growth.
According to the issued statement,
the People’s Bank of China lowered the one-year prime lending rate by 10 basis points to 3.35%,
contrary to expectations that it would remain at 3.45%.
The bank also reduced the five-year prime lending rate by 10 basis points to 3.85%,
Again, we are defying expectations that it will remain at 3.95%.
Notably, the People’s Bank of China’s prime lending rate (LPR) is the benchmark interest rate used in China,
determined monthly by the People’s Bank of China. It is usually set on the 20th of the month,
provided there are no holidays, and the new LPR takes effect from the first day of the following month.
The prime lending rate is a reference rate for banks when setting interest rates for loans issued to their clients.
It is calculated based on the interest rates offered daily
by a committee of 18 selected commercial banks in China to the People’s Bank of China.
The committee comprises both domestic and foreign banks,
with different weights assigned to each bank’s contributions based on its size and importance in the Chinese financial system.
The LPR is based on the average rates offered by these banks,
excluding the highest and lowest rates to reduce volatility and manipulation, and the median rate becomes the LPR.
Dollar Marginally Declines After Biden’s Withdrawal from Presidential Election
The US dollar marginally declined during early trading on Monday
after US President Joe Biden announced his withdrawal from the presidential race.
The Democratic Party is preparing to present a new candidate instead of Biden.
On Sunday, Biden announced his withdrawal from the presidential race and expressed his support for his current Vice President,
Kamala Harris, to replace him as the Democratic candidate in the November election.
Harris quickly gained support from many within the Democratic Party,
but several prominent party figures remained silent,
including former Speaker of the House Nancy Pelosi and others.
Regarding trading, the dollar index,
which measures the performance of the US currency against a basket of six major currencies,
fell by 0.11% to 104.18 points.
Final Reading of U.S. GDP Data Surprises Markets: The final reading of the U.S. GDP data, released by the Bureau of Economic Analysis on Thursday,
showed that the GDP growth rate for the first quarter of this year was revised upward, aligning with market expectations.
The data revealed that the U.S. GDP grew by 1.4% in the first quarter,
matching the anticipated 1.4% growth, up from the initial 1.3% growth reported for the previous quarter.
The GDP price index also grew by 3.1% in the first quarter, slightly above market expectations of 3.0%.
The press release highlighted that the increase in real GDP primarily reflected rises in consumer spending,
fixed residential investment, non-residential fixed investment, and state and local government spending,
partially offset by a decline in private inventory investment and an increase in imports.
Markets closely watch GDP data, which provides a clearer picture of the U.S. economy’s quarterly performance.
Positive data exceeding market expectations generally has a favorable impact on the dollar,
while lower-than-expected readings can negatively affect it.
Temporary Pause for the Dollar After a Four-Day Winning Streak: The dollar index fell to 104.8 on Friday, pausing after four consecutive sessions of gains,
as traders continue to assess the timing of the Federal Reserve’s first interest rate cut.
In the United States, investors will closely watch the Personal Consumption Expenditures (PCE) Price Index,
personal income and spending, and speeches from several Federal Reserve officials.
Additionally, attention will be paid to the second estimate of Q1 GDP growth, corporate earnings,
CB Consumer Confidence and pending home sales.
Globally, the focus will be on inflation rates in Germany and the Eurozone.
GDP growth rates for Switzerland and Canada will be released, along with unemployment rates in the Eurozone.
Key indicators to watch include Germany’s GfK Consumer Climate Index and China’s NBS Manufacturing and Services PMIs.
Finally, in Japan, the focus will be on Governor Ueda’s opening remarks at a Bank of Japan-hosted conference,
along with consumer confidence data, Japan’s CPI, retail sales, unemployment rate, and industrial production.
Oil Rebounds from a Three-Month Low, Records Weekly Loss
West Texas Intermediate (WTI) crude futures rose 1.1% to settle at $77.72 per barrel on Friday.
Still, they recorded a 3% weekly loss as U.S. economic data strengthened expectations that
interest rates may remain high for an extended period, hurting the U.S. economic outlook and energy demand.
Additionally, some Federal Reserve officials indicated readiness to raise interest rates if inflation rises,
according to the latest FOMC minutes. U.S. Energy Information Administration data showed an unexpected
increase in U.S. crude inventories last week.
However, a positive note regarding U.S. gasoline demand reached its highest level in November,
providing some support for oil prices ahead of the U.S. summer driving season.
With the focus shifting to the rescheduled OPEC+ meeting on June 2 (previously scheduled for June 1),
market participants await potential extensions of production cuts by key producers to address global oversupply concerns and support prices.
Temporary Pause for the Dollar After a Four-Day Winning Streak
The dollar index fell to 104.8 on Friday, pausing after four consecutive sessions of gains,
as traders continue to assess the timing of the first interest rate cut by the Federal Reserve.
Global PMI data from S&P in the United States showed strong business activity and increased price pressures in the U.S.
In May, coupled with the hawkish stance from the FOMC minutes, prompting investors to push back rate cut expectations.
The probability of easing in December has now risen to about 82%.
The dollar declined against the euro, the British pound, and the Australian dollar.
Over the week, the dollar gained approximately 0.3%.
Temporary Pause for the Dollar After a Four-Day Winning Streak
Market Activity and Anticipated Economic Events for the Week: As markets keenly await the release of several significant American reports and data,
notable shifts have been observed in various sectors.
This week, gold prices have risen sharply while oil prices have declined.
This article will delve into the key economic events scheduled for the week and analyze the latest market movements.
Gold prices surged by approximately 2.90% during this week’s trading.
The markets await important U.S. data from the Producer and Consumer Price Index on Tuesday and Wednesday.
Any developments in the Middle East will further increase gold prices.
Technically, the price has stabilized above the support levels at 2350
and above the 200-day moving average, targeting the 2400 levels.
Oil News:
West Texas Intermediate crude futures prices fell to $77 per barrel,
with a downward trend forming lower peaks and troughs than before,
breaking a support level and pivotal demand area around $80.
A continued decline to retest the support area around $75 – $76 is expected
unless prices rise and stabilize above the level of $80.75,
which would enhance the likelihood of reaching the main peak of around $87.60.
Dow Jones Industrial Average:
The Dow Jones Industrial Average rose by about 1.95% during this week’s trading.
The markets await important U.S. data from the Producer and Consumer Price Index on Tuesday and Wednesday.
The index has stabilized above the support levels at 39225-39295 and the 200-day moving average, targeting the 39800 levels.
GBPUSD
The pound stabilized around $1.25 levels, and prices are still downward.
If the resistance level around 1.2570 is breached or fails to break higher,
a retest of the support at 1.2423 and then 1.2300 is expected.
However, if it consolidates above the resistance, it will likely rise to the next resistance level around 1.2710 – 1.2895.
EURUSD
The Euro rose against the U.S. dollar by about 0.10% during last week’s trading.
The markets await important U.S. data from the Producer and Consumer Price Index on the upcoming Tuesday and Wednesday.
Technically, the pair has stabilized above the 200-day moving average and the support levels at 1.0755, targeting the 1.0850 levels.
USDJPY
The yen stabilized around the 155 level, forming a bottom at the support level of 151.95
and approaching a resistance level of around 156.28. It is expected to rise again to the 158 – 160 levels.
However, a clear break in the support level would signal a decline in the support area around the 146 levels.
Market Activity and Anticipated Economic Events for the Week
The US dollar asserts its dominance over major currencies as markets price in policy divergence:
The dollar index fell to around 104.6 on Thursday
after investors’ expectations of a nearly 44% rate cut by the Federal Reserve Bank in May diminished,
according to market pricing.
This decline marks a sharp decrease since the beginning of February
when a rate cut by that time was seen as certain,
influenced by strong inflation data and recent comments from central bank officials.
Data on Tuesday showed that the core inflation rate fell to 3.1% in January from 3.4% in December,
but it came in higher than expectations of 2.9%.
The core inflation rate remained unchanged at 3.9%, defying expectations of a slowdown to 3.7%.
Markets are not currently anticipating a rate cut by the Federal Reserve
in March and the likelihood of action in May has been reduced.
Meanwhile, Chicago Federal Reserve President Austan Goolsbee said on Wednesday
that the central bank should be cautious about waiting too long before lowering interest rates.
Federal Reserve Vice Chairman for Supervision Michael Barr also said
that the latest inflation data suggests a clear path toward the 2% inflation target.
Investors are now looking to January retail sales and weekly jobless claims figures on Thursday.
European Union
On the other hand, the European Commission stated that the European Union’s
economy entered 2024 weaker than expected and lowered
its growth forecast for this year by 0.4 percentage points to 0.8% in the euro area.
After narrowly avoiding a technical recession in the second half of last year,
the prospects for the first quarter of this year remain weak, according to economic forecasts for winter 2024.
Forecasts suggest that the European Central Bank, like other major central banks,
will be more stimulative than the US Federal Reserve.
According to Ippek Ozkardeskaya,
senior analyst at Swissquote Bank, markets are currently expecting
more interest rate cuts by the European Central Bank than those made
by the Federal Reserve this year, supporting the strength of the dollar against the euro.
She states, “In this way, the decline in the value of the euro against
the US dollar remains well-supported by fundamentals.”
However, the hawkish shift from the Federal Reserve and the strength
of the US dollar could alleviate the European Central Bank’s dovish
stance and put a brake on euro-selling operations against the US dollar
Oilprices rose as a new wave of strikes launched by the United States against Houthi targets in Yemen
perpetuated tensions in the Middle East and raised the possibility of long-term disruptions in global shipping patterns.
The global benchmark Brent crude oil exceeded $78 a barrel after closing lower yesterday, Wednesday,
while West Texas Intermediate crude approached $73.
US Central Command said the United States bombed more than a dozen Houthi missile launchers in response to the Iranian-backed group’s attacks on ships.
The crisis in Yemen has cut off transit operations through the Red Sea and Suez Canal,
disrupting trade flows, with ships avoiding the region and taking longer alternative routes.
The Biden administration returned the group to the terrorist list.
The Houthis say they are working to support Hamas in its fight against Israel.
Crude oil was hit hard in the first weeks of the year due to the escalating crisis in the Middle East,
in addition to fears that the Federal Reserve will start cutting interest rates later than expected.
In one sign that the global crude oil market may be tightening, the spot spread for West Texas Intermediate crude –
a widely watched measure of near-term supply and demand conditions – turned into a “backorder” state, for the first time since November.
Gao Jian, an analyst at Shandong-based Qixing Futures, said that if the current situation in the Red Sea extends,
there could be a short-term jump in prices, even though weak fundamentals have constrained oil since late last year.
At the same time, the industry-backed American Petroleum Institute reported a slight increase in US crude oil inventories nationwide,
although there was a decline in the main hub in Cushing, Oklahoma.
At the same time, data indicated an increase in gasoline and distillate stocks. Official data is scheduled to be released later on Thursday.
The US dollar has achieved its longest series of increases since last August
The US dollar continued its upward path for the fifth session in a row, today, Wednesday,
achieving the longest series of daily gains since late last August,
supported by the strong rise in US Treasury bond yields and the increasing possibility of keeping federal interest rates at high levels for a longer period.
The reasons
Positive US retail sales and industrial production data for December
Retail sales in the United States witnessed a clear growth last December by 0.6% compared to the previous reading in November,
which stabilized at 0.3%, reflecting the recovery in demand in the country and, consequently, the strength of economic conditions.
Official data also revealed that US industrial production grew by 0.1% last December,
while market expectations indicated a contraction in the index by 0.1% after the index recorded stability at zero levels the previous November.
This indicates the strength of US industrial activity and its Positive repercussions on the country’s economic growth,
and consequently, the dollar rose strongly in today’s transactions.
These positive data supported the Fed’s position to maintain high-interest rates for a longer period, long enough to declare its victory over inflation.
In other words, the markets seem to believe that the central bank will not rush to lower interest rates,
this was confirmed by US Federal Reserve member Waller in his statements issued last Tuesday.
which indicated that the bank is not thinking about reducing interest rates in the near term,
which reflected positively on the movements of the US dollar in the end.
US Treasury yields rise
The clear rise in US Treasury bond yields of various terms led to a recovery in demand for the US dollar in trading.
Looking at today’s transactions, we find that the 10-year US Treasury bond yield rose by 0.82% to a record 4.100%.
At the same time, the 20-year US Treasury bond yield recorded a record.
An increase of approximately 0.34% to 4.437% coincided with a rise in the yield of 30-year US Treasury bonds by approximately 0.20% to 4.313%.
European Central Bank
Supply chain disruptions are one of the top risks to European Central Bank President Christine Lagarde’s
mind as she considers other consequential risks of a resurgence in inflation.
“The things I’m watching carefully are wage negotiations, profit margins, and energy prices,”
Lagarde told Francine Lacqua, during an event held at Bloomberg House in Davos on Wednesday.
“I hope that what I fear will not happen, but supply bottlenecks will come back again.
These are four main components that can “It could have a serious impact on our efforts to combat inflation.”
Other ECB monetary policymakers, including Robert Holzmann,
also viewed the Red Sea developments as a potential threat to consumer prices.
Monetary policymakers have reasons to be concerned. Supply chain disruptions that began during the pandemic were,
in part, behind the initial bout of inflation that occurred before energy prices rose in the wake of Russia’s invasion of Ukraine.
Global trade faces a major challenge in the Red Sea, where the Iran-backed Houthi group
has escalated its attacks against commercial ships over the past months.
comes as the West tries to deter the development of events and avoid conflict Wider awareness of the Middle East,
a region already tense due to the war between Israel and Hamas.
The US dollar returns to strength thanks to lower expectations of early interest cuts: The US dollar returned to a strong recovery at the beginning of the new year, as the dollar index,
which evaluates the US currency against a basket of major currencies, rose to its highest level in five weeks.
This rise came after declining expectations regarding the US Federal Reserve starting to cut interest rates in March,
which pushed the dollar to engage in a period of decline at the end of last year.
While investors were expecting the dollar to continue to decline,
recent economic data was stronger than the Federal Reserve’s expectations,
as labour market data came in strong, and unemployment rates remained at 3.7%.
Inflation rates also witnessed a new rise, as the latest reading recorded 3.4% on an annual basis,
exceeding expectations that indicated stability at 3.1%.
Members of the Federal Reserve, who are characterized by their hawkish orientation,
expressed their opinion that the rate cut may be delayed until the end of the year
while leaving the door open to raise interest rates again.
This statement sparked expectations of a rise in US bond yields, causing the dollar index to jump to 103.60 points.
In another context, the International Monetary Fund (IMF)
indicated in its statements during the Economic Forum
in Davos that the United States had overcome the negative impact of the monetary tightening policy by up to 75%.
This statement may remove some fears of an economic recession in 2024.
The US dollar returns to strength thanks to lower expectations of early interest cuts
EUR/USD Most Closely Watched in The World, The EUR/USD currency pair is one of the most closely watched in the world,
and it has been under slight pressure recently.
The Euro has been relatively weak compared to other major currencies such as the US dollar,
which means that investors are less likely to buy into it.
This could be due to a variety of factors including economic uncertainty in Europe,
geopolitical tensions between European countries,
or even just negative sentiment towards certain European markets.
Despite this recent weakness of the euro, however,
some signs suggest its value may remain stable over time.
For example, many economists believe that Europe’s economy is still on track for growth
despite current volatility and political uncertainty –
meaning there could be a potential upside if these issues can be addressed successfully
by policymakers across Europe going forward.
Additionally, central banks have also taken steps to stabilize their respective economies
with various stimulus measures which should help prop up demand for euros over time as well.
Overall, then while we may see some short-term fluctuations in EUR/USD exchange rates
due to external factors like geopolitics or global market sentiment shifts;
longer-term trends suggest that this currency pair will remain stable overall
with only minor changes from the day-to-day trading activity being seen often
making them an attractive option for investors looking at long-term investments
rather than short-term speculation opportunities alone!
Unexpected Turn of Events
As the European currency continues to face uncertainty in the markets,
there is still a chance that it could rebound and reach recent highs at 1.0920-30 levels.
This would be quite a surprise as such an outcome has not been seen in some time now,
but with today’s rich agenda of macroeconomic data announcements from the US,
it might just be possible for this to happen.
The personal income, personal spending, and the University of Michigan Consumer Sentiment Survey
are all expected to have an impact on exchange rates however unless there is something unexpected
or surprising about these figures then breaking significant levels
will remain difficult for the EUR/USD pair on the last trading day of this week.
It remains unclear what direction things will take over the course of today’s trading session;
but if investors can show confidence in Europe’s economy,
then we may see EURUSD rise back up again and stay high by close off tonight,
which would certainly make for interesting news!
USD/JPY: Economic and Geopolitical Event
The US dollar-Japanese yen (USD/JPY) exchange rate has been in a tight range over the past few weeks,
and according to economist Lee Sue Ann and markets strategist Quek Ser Leang at UOB Group,
this trend is expected to continue in the near term.
The pair is currently hovering around 129.10 – 130.55 as it navigates within its established range of 128.00 – 130.80
Lee Sue Ann notes that USD appears to have moved into a consolidation phase
with no major breakouts or dips expected in the short term
unless there are any unexpected external developments such as an economic shock
or geopolitical event that could cause volatility in currency values across global markets
This stability comes despite recent news from Japan’s economy showing slowing growth
due to weak consumer spending and exports
which had put downward pressure on JPY against other currencies including USD.
Quek Ser Leang adds that while further upside movements cannot be ruled out entirely,
he believes investors should expect more of a sideways movement than anything else given current market conditions.
He also suggests traders may want to stay away from taking large positions
until some clarity emerges about how long this period of consolidation will last Overall,
It seems like USD/JPY will remain to navigate within its established range for now,
but traders should keep an eye out for any potential surprises
or outside factors that could bring about sudden changes in market sentiment.
Would the US dollars Rally, again? Inflation in Japan soared to the highest levels in more than 30 years, to 3.7% in October, up from 3% printed a month earlier.
This is great news for traders and investors as it indicates that the Japanese economy is growing at a healthy pace.
The inflation rate is expected to remain high in the coming months,
which will provide ample opportunities for profit-taking.
High inflation prints sure revived the Bank of Japan (BoJ) hawks and the calls for a policy rate hike,
but it’s unsure whether the BoJ will give up on its ultra-soft policy stance.
Therefore, if the USD picks up momentum against JPY,
which will certainly be the case if US data continues to surprise to the upside as it has been recently,
then USDJPY could easily rebound back above its 50-DMA near 145.
The US dollar has been on a roller coaster ride in recent months,
but I believe it is poised for a recovery.
Here are three reasons why:
Most Fed members remain relatively hawkish regarding the Fed’s policy tightening.
This means that they are still supportive of higher interest rates,
which should help to support the value of the dollar.
The U.S. economy continues to outperform many other developed economies around the world.
This relative strength should eventually start to translate into
more demand for dollars as investors seek out safe havens during periods of global economic uncertainty.
Although geopolitical risks abound, the United States remains one of the most stable countries in the world.
This stability is often underestimated by investors,
but it ultimately supports higher asset values and helps to attract capital flows.
All things being equal, this should benefit the dollar.
Plus, options traders are building a topside structure over the one-month tenor that covers the next US inflation report
and the Fed’s next policy meeting in December.
The move suggests they see scope for a near-term rally in the dollar as these key events approach.
Traders Prepare for Potential Dollar Rally
On Wednesday, data showed that US consumer prices rose moderately in October,
underpinned by higher costs for healthcare and rental accommodation.
This was enough to keep alive expectations that inflation will pick up towards the end of this year
as energy prices rebound from their slump earlier in 2020.
Meanwhile, minutes from the Fed’s last policy meeting suggested that officials are comfortable
with leaving interest rates on hold at current levels
until they see “substantial further progress” on their goals of full employment and 2% inflation.
With both these key event risks looming large,
it’s no surprise to see options traders positioning for a potential dollar rally over the coming month.
In the UK, the autumn budget statement went happily eventless.
Gilts rallied, the pound saw limited sell-off,
while energy companies’ reaction to windfall taxes remained muted.
This was all good news for traders and investors alike as it showed
that the UK economy is still on track despite Brexit uncertainty.
