Despite the BOJ’s best efforts to contain inflation, prices are indeed rising.
Nationwide inflation rose to its highest levels since 1984 at 3.7% y/y and core inflation is also at 3.6%. If food and energy are excluded, CPI is now 1.4% y/y- which is its highest since 1998 we exclude the pre-emptive buying ahead of 2015’s tax hikes. Services PPI is down to 9.1% but historically high after peaking at 10.2% last month.
At 3.7%, nationwide CPI is nearly twice their 2% target. The BOJ were relatively late to the 2% inflation bandwagon by introducing their 2% target in January 2013. Of the 118 months since it was introduced, only 16.1% of them have been above 2%. There was a 12-month period from April 2014, and more recently inflation has been above 2% since April this year and still rising.
Whilst there has been some less expectations that inflation around parts of the world have topped out, recent data for New Zealand is remining us that inflation can remain at elevated levels for longer than anyone would like.
CPI rose 2.2% q/q, up from 1.7% and well above the 1.6% consensus. Annual CPI rose 7.2% y/y – slightly below the 7.3% peak – but if the quarterly is trending higher then it can send the annual higher too. Labor costs have risen to a record high of 3.8% y/y and, whilst the quarterly read pulled back from its record, at 1.1% q/q labor costs remain quite elevated from its long-term average of 0.01%.
At the November 2nd FOMC meeting, members unanimously agreed to hike the Fed Funds rate by 75bps to bring the key rate to 3.75%-4.0%.The statement from the meeting said members agreed that ongoing rate hikes were necessary until rates were “sufficiently restrictive”. In addition, the statement noted that “in determining the pace of rate hikes, we will consider cumulative tightening, policy lags and economic and financial developments”. However, during the press conference which followed, Fed Chairman Powell stated that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated.
The FOMC Minutes released on Wednesday showed that a substantial majority of officials said a slowing in the pace of rate hikes would be appropriate soon. In addition, participants agreed that a slower pace of rate hikes would allow the FOMC to better assess the progress towards its goal, given the associated lags with monetary policy. However, “various” Fed officials saw rates peaking at a higher level, which concurs what Powell’s comments in the press conference. Since the last meeting, numerous Fed speakers have been hinting that the December rate hike will only be 50bps.
On November 2nd , the DXY initially took the statement to mean that the Fed would be dovish. However, it immediately went higher went higher after Powell noted that the terminal rate would be higher. The DXY closed November 2nd near unchanged at 111.55, with a long lower wick. It continued higher into Friday, reaching a high of 113.15. However, after the markets had more time to digest the comments, the DXY traded 220 pips lower near 110.72. Upon doing so, it broke through the bottom trendline of a symmetrical triangle and the Index hasn’t looked back since. The DXY paused its move lower at the 50% retracement level from the lows of March 31st to highs of September 28th near 106.34.
The target for the break of an ascending wedge is a 100% retracement, which is 105.34. This is also the first support level. Below there, price can fall to horizontal support at the lows of August 10th at 104.64, then the lows of June 16th at 103.42. If the DXY moves highs, the first resistance is at the bottom trendline of the previous ascending wedge near 107.50. Above there, price can move to the highs of the wedge at 107.99, then the 50% retracement from the highs of November 10th to the lows of November 15th at 108.17.
The US out on holiday, there’s not much point in discussing the dollar. Instead, something that could move during the Asian hours. The Japanese yen.
After being the weakest of major currencies for an extended period this year, the yen has stormed back against the dollar, along with equities, gold and other risk-sensitive assets. Wednesday’s publication of less hawkish Fed minutes and weaker-than-forecast US business activity data further fueled speculation the Fed is going to slow down its rate increases and potentially pause in early 2023.
As the USD/JPY slumped, other yen pairs have started to move lower with it – including the EUR/JPY – albeit to much lower extent. This is because nothing has changed in terms of the Bank Of Japan’s ultra-loose monetary policy. Thus, the USD/JPY has been hit because of dollar weakness than yen strength.
In terms of the EUR/JPY, it is true that the euro carries some positive yield over the yen. With the ECB determined to get the 10% inflation back down by aggressive rate increases, the disparity between Eurozone and Japan monetary policies are likely to grow larger over time. This is something that should help provide a floor for EUR/JPY in the long-term outlook.
But the short-term, especially with the USD/JPY moving lower, we could see some weakness in the EUR/JPY and other yen pairs. Also, much of the interest rate disparity is already priced in. And with the eurozone economy on its knees, there is a risk that the ECB might end its hiking cycle quicker than expected, reducing the appeal of the single currency over the safe-heaven yen.
The EUR/JPY actually formed a bearish engulfing candle on the daily chart on Wednesday, and we saw some downside follow-through today. The selling then came to a pause as rates tested support and the bullish trend of the triangle pattern around 143.80.
The upside was capped by the bearish trend line and resistance circa 146.00. Shorter-term resistance is seen around 144.65 to 145.00 range. Thus, conservative speculators may wish to wait for price to break out of this triangle consolidation pattern and trade in the direction of the breakout
This week will bring a lot of US macroeconomic data and speech from US Fed Chairman Powell, which should give the markets a clearer direction of where the Fed may be headed next regarding monetary policy. Powell speaks at the Brookings Institute on Wednesday. The topic is the economy and labor market. The statement after the November 2nd FOMC meeting stated that “ in determining the pace of rate hikes, we will consider cumulative tightening, policy lags, and economic and financial developments”. The markets took this to be dovish. However, in the press conference that followed, Powell said that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated. However, the pace of tightening is not as important as the terminal rate. Markets took this to be hawkish, Traders will be looking for Powell to clarify these statements and try to determine if the Fed will hike by 50bps or 75bps at the December meeting. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY print of 5% vs a September reading of 5.1%. If this number is stronger, the Fed may feel comfortable leaning towards a 75bps hike in December. The US will also release Non-Farm payrolls on Friday. Expectations are for a print of 200,000 vs a previous reading of 261,000. The Unemployment rate is expected to remain unchanged at 3.7%.
As China’s “zero-covid” restrictions and lockdowns heat up, so are the emotions of many Chinese people. A fire over the weekend in Xinjiang in which 10 people died , angered protestors who said that the fire was made worse by the zero-covid policy. Riots and clashes with police flared up in some areas where the protests were held, such areas as Shanghai and Beijing. Protestors are frustrated with the amount of quarantines and restrictions. However, despite the lockdowns, Beijing reported record levels of covid. This may lead to even more quarantines and restrictions. WTI crude oil has dropped from a high of 82.51 on November 23rd to an intra-day low of 74.02 on Monday as fears of a lack of demand swelled in the markets. Will the zero-covid policy lead to a recession in China ?
USD/CNH has been on the rise since late-February as it became more apparent that the Fed would begin raising in March. On May 13th, price peaked at 6.8375 before consolidating in a symmetrical triangle. However, on August 15th, USD/CNH broke higher out of the triangle and rose in an ascending wedge formation as price peaked on October 25th at 7.3748. This was also the highest level since 2007. Price then pulled back and broke below the bottom trendline of the wedge, reaching the target for the breakdown near 7.0192. Since then, the pair has been bid, and gapped higher on Monday, opening at 7.2308.
With Fed Chairman Powell speaking, US Core PCE and Non-Farm Payrolls, along with the increase in Covid cases and unrest in China, USD/CNH could be volatile this week. Watch for aggressive moves in the pair should Powell’s speech or the data paint a more hawkish picture heading towards the December 14th meeting.
Australian inflation fell but just ‘weight’ a minute
Australian inflation rose only to 6.9% y/y, down from a peak of 7.4% and lower than the 7.5% expected. Housing, food and non-alcoholic beverages and transport were most significant contributors. CPI rose 0.2% m/m, below its long-term average of 2.5%.
The RBA will be happy to hear that inflation was much lower than expected, even if it does remain historically high. But the ABS report also highlighted that they performed their annual weight adjustment to the CPI basket, and that inflation would have been 7.1% if last year’s methodology was used. But even a move down from 7.4% to 7.1% is noteworthy as it leaves the potential that inflation has in fact peaked.
More broadly the inflationary drivers. It’s nice to see import prices are falling, wages remain well below inflation and that inflation expectation remain well anchored. So now the annualized inflation drop 5 percent points in a month, the case for RBA to pause in December is becoming stronger for a central bank that really does not want to raise rates any more than they need to.
And that is being reflected within the OIS curve, which suggests money markets are now pricing in a lower terminal rate and slower pace of hikes. And that in turn could mean we’ve seen the best part of the AUD/NZD move lower, which so far is struggling to reach the 1.0700 target.
On Monday AUD/JPY fell to a 30-day low and closed beneath 93.00, yet the 92.0 handle and trend support remain close by. And as markets are weighing up the dynamics of a possible China reopening amidst a more hawkish Fed, we are waiting the market to tip its hand and either break beneath 92.0 or rally from it, as part of a clear risk-on or risk-off move.
USD/CAD Nears Two-Month Highs at 1.3850 as Traders Turn Cautious Before US Election
The USD/CAD pair holds steady with two consecutive days of gains, trading around 1.3850 in Friday’s Asian session. This level sits close to Thursday’s two-month high of 1.3868. The US Dollar’s strength underpins the pair’s resilience, fueled by growing expectations that the Federal Reserve may adopt a less aggressive stance on interest rate cuts.
Speculation surrounding the US presidential election in November is also boosting the Dollar, with former President Donald Trump gaining attention. His inflation-focused policies, including higher tariffs and tax cuts, are thought to be adding upward pressure on the Greenback.
During a rally in Las Vegas on Thursday, Trump emphasized his administration’s commitment to economic growth for all Americans, including African American, Hispanic, and Asian American communities, as reported by Reuters. Meanwhile, in Georgia, Vice President Kamala Harris held a rally with the support of prominent figures, including Bruce Springsteen, Tyler Perry, and former President Barack Obama, drawing thousands in the battleground state.
The Canadian Dollar (CAD), sensitive to commodity prices, is facing pressure as crude oil prices decline. Canada, the largest oil exporter to the US, is affected by West Texas Intermediate (WTI) crude’s drop, currently marking its third consecutive day of losses and trading around $70.20 per barrel.
Traders are watching for Canada’s Retail Sales data, due later in the North American session, and Bank of Canada (BoC) Governor Tiff Macklem’s speech at the IMF meeting, which could provide further insights into Canada’s economic outlook.
USD/CHF Stays Below 0.8650 as Market Caution Intensifies Ahead of US Presidential Election
USD/CHF remains steady around 0.8640 in Asian trading hours on Tuesday, following losses in the previous session. The US Dollar (USD) is holding its ground as market participants exercise caution amid uncertainties surrounding the upcoming US presidential election. Additionally, rising US Treasury yields provide further support for the Greenback.
Opinion polls indicate a tight race between former President Donald Trump and Vice President Kamala Harris. The outcome could remain undetermined for days after Tuesday’s vote, with both Trump and Harris expressing confidence while campaigning in Pennsylvania on the final day of this highly contested race.
The US Dollar Index (DXY), which tracks the USD against six major currencies, is trading around 103.90, with 2-year and 10-year US Treasury yields at 4.16% and 4.29%, respectively, as of this writing.
The Swiss Franc (CHF) faces potential challenges as the likelihood of rate cuts by the Swiss National Bank (SNB) grows. This outlook is fueled by ongoing inflation slowdown in Switzerland, evidenced by a 0.6% year-over-year decline in the Consumer Price Index (CPI) for October. This CPI figure falls below the SNB’s fourth-quarter inflation target of 1%, raising the possibility of a more significant rate cut in December to maintain inflation within the bank’s target range of 0-2%.
EUR/USD Hovering Near 1.0750 with Downward Pressure Amid Political Shifts in the U.S
The EUR/USD pair remains around 1.0740 during the Asian session on Thursday, after experiencing a 2% decline in the previous session. The pair appears to be under downside pressure as the U.S. Dollar gains traction, potentially benefiting from renewed interest in “Trump trades” following the Republican Party’s victory in the U.S. elections.
The Republican victory suggests a potential shift in policy, with Donald Trump’s party likely to take control of both congressional chambers. This would mark a return to their agenda of tax cuts, deregulation, and border security initiatives, priorities not seen in the past eight years. Early legislative goals include extending the 2017 tax cuts, securing funds for the U.S.-Mexico border wall, cutting unspent Democratic-allocated funds, dismantling the Department of Education, and curtailing the authority of the Consumer Financial Protection Bureau, as reported by Reuters.
Despite this, the U.S. Dollar Index (DXY), which measures the dollar against a basket of six major currencies, has slightly declined from a recent four-month high of 105.44, now trading near 104.90. This comes amid a pullback in U.S. Treasury yields after reaching recent highs of 4.31% and 4.47%.
Markets widely anticipate a 25 basis-point rate cut by the Federal Reserve at its November meeting, with the CME FedWatch Tool indicating a 98.1% probability for this outcome. The move reflects market consensus for a modest reduction in interest rates this month.
In Europe, if economic growth slows due to potential new tariffs, the European Central Bank (ECB) may be pressured to implement more accommodative measures, with forecasts suggesting a potential rate cut to near zero by 2025. Expectations lean towards a 25-basis-point cut to the Deposit Facility Rate by December.
Meanwhile, EU economic data remains light this week. Pan-EU Retail Sales figures are due Thursday, and an EU leaders’ summit wraps up Friday, followed by ECB President Lagarde’s appearance on Saturday.
EUR/USD Hovers Near 1.0600 as US Dollar Retreats on Profit-Taking
The EUR/USD pair remains steady with a positive bias around the 1.0600 mark during Tuesday’s Asian session. The pair’s upward momentum appears supported by a softer US Dollar (USD), which is undergoing profit-taking after its recent rally.
Despite the USD’s pullback, its downside remains limited due to hawkish comments from Federal Reserve (Fed) Chair Jerome Powell. Powell emphasized the economy’s resilience, a robust labor market, and persistent inflation pressures, cautioning that the Fed sees no urgency to cut interest rates. Market participants are now awaiting further insights from Fed officials later this week regarding the future direction of monetary policy.
The USD could also regain strength as investors expect the incoming Trump administration to implement tax cuts and higher tariffs—policies that may drive inflation, potentially slowing the pace of Fed rate cuts.
On the European side, European Central Bank (ECB) President Christine Lagarde highlighted structural challenges in the region. Speaking on Monday, Lagarde called for a consolidation of resources in areas such as defense and climate, citing stagnating productivity growth and increasing global fragmentation into competitive blocs. She noted that Europe lags behind the US and China in innovation and productivity, with barriers such as a fragmented digital market and insufficient venture capital hindering technological progress.
Looking ahead, traders are focused on key economic data. The Eurozone’s October Harmonized Index of Consumer Prices (HICP) is due for release on Tuesday, followed by US Building Permits and Housing Starts data during the North American session. These reports could provide further direction for EUR/USD in the near term.
USD/CAD Holds Near One-Week Low, Trades Range-Bound Above Mid-1.3900s
The USD/CAD pair has found support near the mid-1.3900s, marking a one-week low during Wednesday’s Asian session. However, the pair struggles to gain upward momentum, pausing this week’s pullback from its highest level since May 2020. Mixed fundamental signals keep bullish traders cautious.
Canadian Inflation and BoC Outlook Canada’s annual inflation rate rose more than expected to 2.0% in October, prompting a recalibration of market expectations for a significant rate cut by the Bank of Canada (BoC) in December. This has provided some support for the Canadian Dollar (CAD), offsetting pressure on the USD/CAD pair. However, subdued crude oil prices continue to cap the Loonie’s gains, limiting its appreciation.
Crude Oil Dynamics While fears of supply disruptions due to the Russia-Ukraine conflict persist, crude oil prices remain constrained by signs of increased U.S. stockpiles. The American Petroleum Institute (API) reported a larger-than-expected build of 4.75 million barrels in U.S. inventories last week, indicating ample supply and dampening oil’s recent recovery from a two-month low.
U.S. Dollar and Treasury Yields On the U.S. side, a resurgence in dip-buying for the U.S. Dollar (USD) offers support to the USD/CAD pair. Expectations that U.S. fiscal policies under President-elect Donald Trump could stimulate economic growth and fuel inflation have bolstered U.S. Treasury yields, enhancing USD demand. This dynamic limits the pair’s downside potential.
Upcoming Market Catalysts Looking ahead, market participants will closely monitor speeches by Federal Open Market Committee (FOMC) members for insights into the Federal Reserve’s rate trajectory. Additionally, the U.S. Energy Information Administration (EIA) will release official crude oil inventory data, which could impact oil prices and generate near-term trading opportunities for the USD/CAD pair.
In the absence of clear directional drivers, the USD/CAD pair is likely to remain range-bound in the short term, with traders focusing on incoming data and policy signals for further cues.
EUR/USD Slips Below 1.0550 Amid Awaited ECB Lagarde Speech and US PMI Data
The EUR/USD pair extended its decline to around 1.0530 during early Asian trading on Monday, pressured by a strengthening US Dollar (USD). Traders are focusing on key events scheduled for later in the day, including European Central Bank (ECB) President Christine Lagarde’s speech and the release of the US ISM Manufacturing PMI.
In the Eurozone, November’s Harmonized Index of Consumer Prices (HICP) rose to 2.3% year-over-year, up from October’s 2.0%, aligning with market expectations and surpassing the ECB’s 2.0% target. Core HICP also edged higher, rising to 2.8% YoY from 2.7% in the prior reading, meeting forecasts.
Markets are pricing in a 25 basis-point (bps) rate cut by the ECB in December, marking the central bank’s fourth reduction of the year. However, expectations for a larger 50 bps cut have waned, supported by marginal improvements in the Eurozone’s subdued growth outlook. Anticipation of rate cuts continues to weigh on the Euro (EUR).
Meanwhile, the US Dollar finds support from the Federal Reserve’s cautious stance. Fed Chair Jerome Powell recently emphasized the lack of urgency to lower interest rates, citing the economy’s resilience. “The strength we are seeing in the economy allows us to make decisions carefully,” Powell stated. According to the CME FedWatch Tool, markets currently estimate a 65.4% probability of a 25 bps Fed rate cut in December.
The diverging monetary policy outlooks between the ECB and the Fed are likely to drive further volatility in the EUR/USD pair as traders assess upcoming data and central bank signals.
The GBP/USD pair remains in positive territory for the second consecutive day, trading near 1.2690 during Wednesday’s early European session. However, the upside potential appears limited as expectations of a less aggressive interest rate cut by the US Federal Reserve and concerns over President-elect Donald Trump’s tariff policies lend support to the US Dollar. Investors are closely watching Federal Reserve Chair Jerome Powell’s speech for insights into the interest rate outlook.
From a technical perspective, the bearish bias for GBP/USD persists, with the pair holding below the critical 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI), hovering below the midline at 45.35, signals potential further downside.
Key support is located at the psychological level of 1.2600. A break below this level could expose the next target at 1.2467, the lower limit of the Bollinger Band, with further declines potentially testing 1.2331, the low from April 23.
On the upside, resistance is initially seen at 1.2750, the high from November 29. A sustained move above this level could pave the way for a rally toward 1.2875 (the 100-day EMA), with an additional resistance zone at 1.2920, aligning with the upper Bollinger Band boundary.
EUR/USD Gains Momentum Ahead of Key NFP Data Release The EUR/USD pair climbed on Thursday, rising by 0.7% to approach the 1.0600 level. The move comes as better-than-expected European retail sales data for October temporarily buoyed sentiment, despite a monthly decline. Meanwhile, expectations of an ECB rate cut and a risk-on market mood ahead of Friday’s US Nonfarm Payrolls (NFP) report are keeping the currency pair in focus.
ECB Poised for Another Rate Cut Amid Mixed Economic Signals October retail sales across the EU increased by 1.9% YoY, beating the 1.7% forecast, though still sharply lower than September’s revised 3.0%. This decline in broader economic activity has led to rising expectations of more aggressive rate cuts from the European Central Bank (ECB). ECB President Christine Lagarde reiterated the bank’s commitment to fostering growth, projecting that inflation would ease again by 2025 despite a near-term bump in Q4.
Markets are pricing in a 25-bps rate cut from the ECB next week. Political turmoil in France, including President Emmanuel Macron surviving a no-confidence vote and planning to appoint a new Prime Minister, has been largely brushed aside by investors.
US Labor Market Data Adds Complexity to NFP Expectations In the US, Initial Jobless Claims rose to 224,000 for the week ending November 29, the highest in six weeks, missing expectations of 215,000. Challenger Job Cuts also increased to 57,727 in November, signaling potential cracks in the labor market. However, these figures are seen as less significant compared to the looming NFP data, which is expected to show a strong rebound of 200,000 job additions in November following October’s hurricane- and strike-impacted figure of 12,000.
EUR/USD Technical Analysis Current Outlook: The EUR/USD daily chart reflects a consolidation phase following a substantial downtrend that started in mid-July. After peaking near 1.1270, the pair experienced a steep decline, breaking below major support levels, including the 200-day EMA (1.0834) and the critical psychological level of 1.0600.
Recent Action: The pair recently rebounded from a November low of 1.0450, showing resilience around the 1.0588 level. Thursday’s bullish daily candle indicates growing momentum, with the pair breaking above the short-term resistance at 1.0550.
Upside Potential: A sustained move above 1.0600 could set the stage for further gains, potentially targeting the 50-day EMA at 1.0715. Breaking this level could validate a broader trend reversal and pave the way for a test of the 200-day EMA at 1.0834.
Downside Risks: On the downside, the MACD remains negative but shows signs of weakening bearish momentum. A failure to maintain the current rally could see EUR/USD revisiting support at 1.0500, with the critical 1.0450 low serving as a key threshold for bullish traders.
Key Levels to Watch: Bullish Breakout: Daily close above 1.0600 Support Levels: 1.0500 and 1.0450 Resistance Levels: 1.0715 (50-day EMA) and 1.0834 (200-day EMA) Market Sentiment The EUR/USD’s performance hinges on Friday’s NFP data. A strong report could bolster the USD, potentially pressuring the pair back below 1.0550. Conversely, a weaker-than-expected NFP could fuel a risk-on rally, driving EUR/USD above 1.0600 and closer to 1.0700 in the near term. Traders should closely monitor the interplay between US labor data and ECB policy signals for the next directional move.
GBP/USD Rebounds as US Dollar Weakens Amid Rising Fed Rate Cut Expectations
GBP/USD has recovered losses from the previous session, trading near 1.2770 during Thursday’s Asian session. The pair gains strength as the US Dollar (USD) retreats from a four-day winning streak, despite support from elevated US Treasury yields.
The US Dollar Index (DXY), which tracks the USD against six major currencies, hovers around 106.50. Meanwhile, yields on US 2-year and 10-year Treasury bonds are reported at 4.16% and 4.28%, respectively.
The USD faces headwinds as the latest US Consumer Price Index (CPI) data does little to deter speculation of a Federal Reserve (Fed) rate cut in December. According to the CME FedWatch Tool, there is nearly a 99% probability of a 25-basis-point rate reduction during the Fed’s December 18 meeting. Market participants now turn their attention to the US November Producer Price Index (PPI), set for release later on Thursday, for further direction.
In November, the US CPI rose to 2.7% year-over-year, up from 2.6% in October, aligning with expectations. Month-over-month, headline CPI posted a 0.3% increase, matching market consensus. Core CPI, excluding food and energy, advanced 3.3% YoY and 0.3% MoM, both in line with forecasts.
In the UK, the RICS Housing Price Balance jumped to 25% in November, up from 16% in October and exceeding the expected 19% increase. Published by the Royal Institution of Chartered Surveyors, this measure reflects a strengthening UK housing market, often viewed as a proxy for the broader economy.
The British Pound (GBP) benefits from growing market confidence in the Bank of England (BoE) maintaining its interest rate at 4.75% in December. BoE policymakers are widely expected to hold rates steady. Traders now shift their focus to the UK’s October monthly GDP data, scheduled for release on Friday, for additional economic cues.
Comments
Despite the BOJ’s best efforts to contain inflation, prices are indeed rising.
Nationwide inflation rose to its highest levels since 1984 at 3.7% y/y and core inflation is also at 3.6%. If food and energy are excluded, CPI is now 1.4% y/y- which is its highest since 1998 we exclude the pre-emptive buying ahead of 2015’s tax hikes. Services PPI is down to 9.1% but historically high after peaking at 10.2% last month.
At 3.7%, nationwide CPI is nearly twice their 2% target. The BOJ were relatively late to the 2% inflation bandwagon by introducing their 2% target in January 2013. Of the 118 months since it was introduced, only 16.1% of them have been above 2%. There was a 12-month period from April 2014, and more recently inflation has been above 2% since April this year and still rising.
Whilst there has been some less expectations that inflation around parts of the world have topped out, recent data for New Zealand is remining us that inflation can remain at elevated levels for longer than anyone would like.
CPI rose 2.2% q/q, up from 1.7% and well above the 1.6% consensus. Annual CPI rose 7.2% y/y – slightly below the 7.3% peak – but if the quarterly is trending higher then it can send the annual higher too. Labor costs have risen to a record high of 3.8% y/y and, whilst the quarterly read pulled back from its record, at 1.1% q/q labor costs remain quite elevated from its long-term average of 0.01%.
At the November 2nd FOMC meeting, members unanimously agreed to hike the Fed Funds rate by 75bps to bring the key rate to 3.75%-4.0%.The statement from the meeting said members agreed that ongoing rate hikes were necessary until rates were “sufficiently restrictive”. In addition, the statement noted that “in determining the pace of rate hikes, we will consider cumulative tightening, policy lags and economic and financial developments”. However, during the press conference which followed, Fed Chairman Powell stated that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated.
The FOMC Minutes released on Wednesday showed that a substantial majority of officials said a slowing in the pace of rate hikes would be appropriate soon. In addition, participants agreed that a slower pace of rate hikes would allow the FOMC to better assess the progress towards its goal, given the associated lags with monetary policy. However, “various” Fed officials saw rates peaking at a higher level, which concurs what Powell’s comments in the press conference. Since the last meeting, numerous Fed speakers have been hinting that the December rate hike will only be 50bps.
On November 2nd , the DXY initially took the statement to mean that the Fed would be dovish. However, it immediately went higher went higher after Powell noted that the terminal rate would be higher. The DXY closed November 2nd near unchanged at 111.55, with a long lower wick. It continued higher into Friday, reaching a high of 113.15. However, after the markets had more time to digest the comments, the DXY traded 220 pips lower near 110.72. Upon doing so, it broke through the bottom trendline of a symmetrical triangle and the Index hasn’t looked back since. The DXY paused its move lower at the 50% retracement level from the lows of March 31st to highs of September 28th near 106.34.
The target for the break of an ascending wedge is a 100% retracement, which is 105.34. This is also the first support level. Below there, price can fall to horizontal support at the lows of August 10th at 104.64, then the lows of June 16th at 103.42. If the DXY moves highs, the first resistance is at the bottom trendline of the previous ascending wedge near 107.50. Above there, price can move to the highs of the wedge at 107.99, then the 50% retracement from the highs of November 10th to the lows of November 15th at 108.17.
The US out on holiday, there’s not much point in discussing the dollar. Instead, something that could move during the Asian hours. The Japanese yen.
After being the weakest of major currencies for an extended period this year, the yen has stormed back against the dollar, along with equities, gold and other risk-sensitive assets. Wednesday’s publication of less hawkish Fed minutes and weaker-than-forecast US business activity data further fueled speculation the Fed is going to slow down its rate increases and potentially pause in early 2023.
As the USD/JPY slumped, other yen pairs have started to move lower with it – including the EUR/JPY – albeit to much lower extent. This is because nothing has changed in terms of the Bank Of Japan’s ultra-loose monetary policy. Thus, the USD/JPY has been hit because of dollar weakness than yen strength.
In terms of the EUR/JPY, it is true that the euro carries some positive yield over the yen. With the ECB determined to get the 10% inflation back down by aggressive rate increases, the disparity between Eurozone and Japan monetary policies are likely to grow larger over time. This is something that should help provide a floor for EUR/JPY in the long-term outlook.
But the short-term, especially with the USD/JPY moving lower, we could see some weakness in the EUR/JPY and other yen pairs. Also, much of the interest rate disparity is already priced in. And with the eurozone economy on its knees, there is a risk that the ECB might end its hiking cycle quicker than expected, reducing the appeal of the single currency over the safe-heaven yen.
The EUR/JPY actually formed a bearish engulfing candle on the daily chart on Wednesday, and we saw some downside follow-through today. The selling then came to a pause as rates tested support and the bullish trend of the triangle pattern around 143.80.
The upside was capped by the bearish trend line and resistance circa 146.00. Shorter-term resistance is seen around 144.65 to 145.00 range. Thus, conservative speculators may wish to wait for price to break out of this triangle consolidation pattern and trade in the direction of the breakout
This week will bring a lot of US macroeconomic data and speech from US Fed Chairman Powell, which should give the markets a clearer direction of where the Fed may be headed next regarding monetary policy. Powell speaks at the Brookings Institute on Wednesday. The topic is the economy and labor market. The statement after the November 2nd FOMC meeting stated that “ in determining the pace of rate hikes, we will consider cumulative tightening, policy lags, and economic and financial developments”. The markets took this to be dovish. However, in the press conference that followed, Powell said that the incoming data suggests that the ultimate level of rates will be higher than previously anticipated. However, the pace of tightening is not as important as the terminal rate. Markets took this to be hawkish, Traders will be looking for Powell to clarify these statements and try to determine if the Fed will hike by 50bps or 75bps at the December meeting. In addition, the US will release the Fed’s favorite measure of inflation, Core PCE. Expectations are for a YoY print of 5% vs a September reading of 5.1%. If this number is stronger, the Fed may feel comfortable leaning towards a 75bps hike in December. The US will also release Non-Farm payrolls on Friday. Expectations are for a print of 200,000 vs a previous reading of 261,000. The Unemployment rate is expected to remain unchanged at 3.7%.
As China’s “zero-covid” restrictions and lockdowns heat up, so are the emotions of many Chinese people. A fire over the weekend in Xinjiang in which 10 people died , angered protestors who said that the fire was made worse by the zero-covid policy. Riots and clashes with police flared up in some areas where the protests were held, such areas as Shanghai and Beijing. Protestors are frustrated with the amount of quarantines and restrictions. However, despite the lockdowns, Beijing reported record levels of covid. This may lead to even more quarantines and restrictions. WTI crude oil has dropped from a high of 82.51 on November 23rd to an intra-day low of 74.02 on Monday as fears of a lack of demand swelled in the markets. Will the zero-covid policy lead to a recession in China ?
USD/CNH has been on the rise since late-February as it became more apparent that the Fed would begin raising in March. On May 13th, price peaked at 6.8375 before consolidating in a symmetrical triangle. However, on August 15th, USD/CNH broke higher out of the triangle and rose in an ascending wedge formation as price peaked on October 25th at 7.3748. This was also the highest level since 2007. Price then pulled back and broke below the bottom trendline of the wedge, reaching the target for the breakdown near 7.0192. Since then, the pair has been bid, and gapped higher on Monday, opening at 7.2308.
With Fed Chairman Powell speaking, US Core PCE and Non-Farm Payrolls, along with the increase in Covid cases and unrest in China, USD/CNH could be volatile this week. Watch for aggressive moves in the pair should Powell’s speech or the data paint a more hawkish picture heading towards the December 14th meeting.
Australian inflation rose only to 6.9% y/y, down from a peak of 7.4% and lower than the 7.5% expected. Housing, food and non-alcoholic beverages and transport were most significant contributors. CPI rose 0.2% m/m, below its long-term average of 2.5%.
The RBA will be happy to hear that inflation was much lower than expected, even if it does remain historically high. But the ABS report also highlighted that they performed their annual weight adjustment to the CPI basket, and that inflation would have been 7.1% if last year’s methodology was used. But even a move down from 7.4% to 7.1% is noteworthy as it leaves the potential that inflation has in fact peaked.
More broadly the inflationary drivers. It’s nice to see import prices are falling, wages remain well below inflation and that inflation expectation remain well anchored. So now the annualized inflation drop 5 percent points in a month, the case for RBA to pause in December is becoming stronger for a central bank that really does not want to raise rates any more than they need to.
And that is being reflected within the OIS curve, which suggests money markets are now pricing in a lower terminal rate and slower pace of hikes. And that in turn could mean we’ve seen the best part of the AUD/NZD move lower, which so far is struggling to reach the 1.0700 target.
On Monday AUD/JPY fell to a 30-day low and closed beneath 93.00, yet the 92.0 handle and trend support remain close by. And as markets are weighing up the dynamics of a possible China reopening amidst a more hawkish Fed, we are waiting the market to tip its hand and either break beneath 92.0 or rally from it, as part of a clear risk-on or risk-off move.
The USD/CAD pair holds steady with two consecutive days of gains, trading around 1.3850 in Friday’s Asian session. This level sits close to Thursday’s two-month high of 1.3868. The US Dollar’s strength underpins the pair’s resilience, fueled by growing expectations that the Federal Reserve may adopt a less aggressive stance on interest rate cuts.
Speculation surrounding the US presidential election in November is also boosting the Dollar, with former President Donald Trump gaining attention. His inflation-focused policies, including higher tariffs and tax cuts, are thought to be adding upward pressure on the Greenback.
During a rally in Las Vegas on Thursday, Trump emphasized his administration’s commitment to economic growth for all Americans, including African American, Hispanic, and Asian American communities, as reported by Reuters. Meanwhile, in Georgia, Vice President Kamala Harris held a rally with the support of prominent figures, including Bruce Springsteen, Tyler Perry, and former President Barack Obama, drawing thousands in the battleground state.
The Canadian Dollar (CAD), sensitive to commodity prices, is facing pressure as crude oil prices decline. Canada, the largest oil exporter to the US, is affected by West Texas Intermediate (WTI) crude’s drop, currently marking its third consecutive day of losses and trading around $70.20 per barrel.
Traders are watching for Canada’s Retail Sales data, due later in the North American session, and Bank of Canada (BoC) Governor Tiff Macklem’s speech at the IMF meeting, which could provide further insights into Canada’s economic outlook.
USD/CHF remains steady around 0.8640 in Asian trading hours on Tuesday, following losses in the previous session. The US Dollar (USD) is holding its ground as market participants exercise caution amid uncertainties surrounding the upcoming US presidential election. Additionally, rising US Treasury yields provide further support for the Greenback.
Opinion polls indicate a tight race between former President Donald Trump and Vice President Kamala Harris. The outcome could remain undetermined for days after Tuesday’s vote, with both Trump and Harris expressing confidence while campaigning in Pennsylvania on the final day of this highly contested race.
The US Dollar Index (DXY), which tracks the USD against six major currencies, is trading around 103.90, with 2-year and 10-year US Treasury yields at 4.16% and 4.29%, respectively, as of this writing.
The Swiss Franc (CHF) faces potential challenges as the likelihood of rate cuts by the Swiss National Bank (SNB) grows. This outlook is fueled by ongoing inflation slowdown in Switzerland, evidenced by a 0.6% year-over-year decline in the Consumer Price Index (CPI) for October. This CPI figure falls below the SNB’s fourth-quarter inflation target of 1%, raising the possibility of a more significant rate cut in December to maintain inflation within the bank’s target range of 0-2%.
The EUR/USD pair remains around 1.0740 during the Asian session on Thursday, after experiencing a 2% decline in the previous session. The pair appears to be under downside pressure as the U.S. Dollar gains traction, potentially benefiting from renewed interest in “Trump trades” following the Republican Party’s victory in the U.S. elections.
The Republican victory suggests a potential shift in policy, with Donald Trump’s party likely to take control of both congressional chambers. This would mark a return to their agenda of tax cuts, deregulation, and border security initiatives, priorities not seen in the past eight years. Early legislative goals include extending the 2017 tax cuts, securing funds for the U.S.-Mexico border wall, cutting unspent Democratic-allocated funds, dismantling the Department of Education, and curtailing the authority of the Consumer Financial Protection Bureau, as reported by Reuters.
Despite this, the U.S. Dollar Index (DXY), which measures the dollar against a basket of six major currencies, has slightly declined from a recent four-month high of 105.44, now trading near 104.90. This comes amid a pullback in U.S. Treasury yields after reaching recent highs of 4.31% and 4.47%.
Markets widely anticipate a 25 basis-point rate cut by the Federal Reserve at its November meeting, with the CME FedWatch Tool indicating a 98.1% probability for this outcome. The move reflects market consensus for a modest reduction in interest rates this month.
In Europe, if economic growth slows due to potential new tariffs, the European Central Bank (ECB) may be pressured to implement more accommodative measures, with forecasts suggesting a potential rate cut to near zero by 2025. Expectations lean towards a 25-basis-point cut to the Deposit Facility Rate by December.
Meanwhile, EU economic data remains light this week. Pan-EU Retail Sales figures are due Thursday, and an EU leaders’ summit wraps up Friday, followed by ECB President Lagarde’s appearance on Saturday.
The EUR/USD pair remains steady with a positive bias around the 1.0600 mark during Tuesday’s Asian session. The pair’s upward momentum appears supported by a softer US Dollar (USD), which is undergoing profit-taking after its recent rally.
Despite the USD’s pullback, its downside remains limited due to hawkish comments from Federal Reserve (Fed) Chair Jerome Powell. Powell emphasized the economy’s resilience, a robust labor market, and persistent inflation pressures, cautioning that the Fed sees no urgency to cut interest rates. Market participants are now awaiting further insights from Fed officials later this week regarding the future direction of monetary policy.
The USD could also regain strength as investors expect the incoming Trump administration to implement tax cuts and higher tariffs—policies that may drive inflation, potentially slowing the pace of Fed rate cuts.
On the European side, European Central Bank (ECB) President Christine Lagarde highlighted structural challenges in the region. Speaking on Monday, Lagarde called for a consolidation of resources in areas such as defense and climate, citing stagnating productivity growth and increasing global fragmentation into competitive blocs. She noted that Europe lags behind the US and China in innovation and productivity, with barriers such as a fragmented digital market and insufficient venture capital hindering technological progress.
Looking ahead, traders are focused on key economic data. The Eurozone’s October Harmonized Index of Consumer Prices (HICP) is due for release on Tuesday, followed by US Building Permits and Housing Starts data during the North American session. These reports could provide further direction for EUR/USD in the near term.
The USD/CAD pair has found support near the mid-1.3900s, marking a one-week low during Wednesday’s Asian session. However, the pair struggles to gain upward momentum, pausing this week’s pullback from its highest level since May 2020. Mixed fundamental signals keep bullish traders cautious.
Canadian Inflation and BoC Outlook
Canada’s annual inflation rate rose more than expected to 2.0% in October, prompting a recalibration of market expectations for a significant rate cut by the Bank of Canada (BoC) in December. This has provided some support for the Canadian Dollar (CAD), offsetting pressure on the USD/CAD pair. However, subdued crude oil prices continue to cap the Loonie’s gains, limiting its appreciation.
Crude Oil Dynamics
While fears of supply disruptions due to the Russia-Ukraine conflict persist, crude oil prices remain constrained by signs of increased U.S. stockpiles. The American Petroleum Institute (API) reported a larger-than-expected build of 4.75 million barrels in U.S. inventories last week, indicating ample supply and dampening oil’s recent recovery from a two-month low.
U.S. Dollar and Treasury Yields
On the U.S. side, a resurgence in dip-buying for the U.S. Dollar (USD) offers support to the USD/CAD pair. Expectations that U.S. fiscal policies under President-elect Donald Trump could stimulate economic growth and fuel inflation have bolstered U.S. Treasury yields, enhancing USD demand. This dynamic limits the pair’s downside potential.
Upcoming Market Catalysts
Looking ahead, market participants will closely monitor speeches by Federal Open Market Committee (FOMC) members for insights into the Federal Reserve’s rate trajectory. Additionally, the U.S. Energy Information Administration (EIA) will release official crude oil inventory data, which could impact oil prices and generate near-term trading opportunities for the USD/CAD pair.
In the absence of clear directional drivers, the USD/CAD pair is likely to remain range-bound in the short term, with traders focusing on incoming data and policy signals for further cues.
The EUR/USD pair extended its decline to around 1.0530 during early Asian trading on Monday, pressured by a strengthening US Dollar (USD). Traders are focusing on key events scheduled for later in the day, including European Central Bank (ECB) President Christine Lagarde’s speech and the release of the US ISM Manufacturing PMI.
In the Eurozone, November’s Harmonized Index of Consumer Prices (HICP) rose to 2.3% year-over-year, up from October’s 2.0%, aligning with market expectations and surpassing the ECB’s 2.0% target. Core HICP also edged higher, rising to 2.8% YoY from 2.7% in the prior reading, meeting forecasts.
Markets are pricing in a 25 basis-point (bps) rate cut by the ECB in December, marking the central bank’s fourth reduction of the year. However, expectations for a larger 50 bps cut have waned, supported by marginal improvements in the Eurozone’s subdued growth outlook. Anticipation of rate cuts continues to weigh on the Euro (EUR).
Meanwhile, the US Dollar finds support from the Federal Reserve’s cautious stance. Fed Chair Jerome Powell recently emphasized the lack of urgency to lower interest rates, citing the economy’s resilience. “The strength we are seeing in the economy allows us to make decisions carefully,” Powell stated. According to the CME FedWatch Tool, markets currently estimate a 65.4% probability of a 25 bps Fed rate cut in December.
The diverging monetary policy outlooks between the ECB and the Fed are likely to drive further volatility in the EUR/USD pair as traders assess upcoming data and central bank signals.
The GBP/USD pair remains in positive territory for the second consecutive day, trading near 1.2690 during Wednesday’s early European session. However, the upside potential appears limited as expectations of a less aggressive interest rate cut by the US Federal Reserve and concerns over President-elect Donald Trump’s tariff policies lend support to the US Dollar. Investors are closely watching Federal Reserve Chair Jerome Powell’s speech for insights into the interest rate outlook.
From a technical perspective, the bearish bias for GBP/USD persists, with the pair holding below the critical 100-day Exponential Moving Average (EMA) on the daily chart. Additionally, the 14-day Relative Strength Index (RSI), hovering below the midline at 45.35, signals potential further downside.
Key support is located at the psychological level of 1.2600. A break below this level could expose the next target at 1.2467, the lower limit of the Bollinger Band, with further declines potentially testing 1.2331, the low from April 23.
On the upside, resistance is initially seen at 1.2750, the high from November 29. A sustained move above this level could pave the way for a rally toward 1.2875 (the 100-day EMA), with an additional resistance zone at 1.2920, aligning with the upper Bollinger Band boundary.
The EUR/USD pair climbed on Thursday, rising by 0.7% to approach the 1.0600 level. The move comes as better-than-expected European retail sales data for October temporarily buoyed sentiment, despite a monthly decline. Meanwhile, expectations of an ECB rate cut and a risk-on market mood ahead of Friday’s US Nonfarm Payrolls (NFP) report are keeping the currency pair in focus.
ECB Poised for Another Rate Cut Amid Mixed Economic Signals
October retail sales across the EU increased by 1.9% YoY, beating the 1.7% forecast, though still sharply lower than September’s revised 3.0%. This decline in broader economic activity has led to rising expectations of more aggressive rate cuts from the European Central Bank (ECB). ECB President Christine Lagarde reiterated the bank’s commitment to fostering growth, projecting that inflation would ease again by 2025 despite a near-term bump in Q4.
Markets are pricing in a 25-bps rate cut from the ECB next week. Political turmoil in France, including President Emmanuel Macron surviving a no-confidence vote and planning to appoint a new Prime Minister, has been largely brushed aside by investors.
US Labor Market Data Adds Complexity to NFP Expectations
In the US, Initial Jobless Claims rose to 224,000 for the week ending November 29, the highest in six weeks, missing expectations of 215,000. Challenger Job Cuts also increased to 57,727 in November, signaling potential cracks in the labor market. However, these figures are seen as less significant compared to the looming NFP data, which is expected to show a strong rebound of 200,000 job additions in November following October’s hurricane- and strike-impacted figure of 12,000.
EUR/USD Technical Analysis
Current Outlook: The EUR/USD daily chart reflects a consolidation phase following a substantial downtrend that started in mid-July. After peaking near 1.1270, the pair experienced a steep decline, breaking below major support levels, including the 200-day EMA (1.0834) and the critical psychological level of 1.0600.
Recent Action: The pair recently rebounded from a November low of 1.0450, showing resilience around the 1.0588 level. Thursday’s bullish daily candle indicates growing momentum, with the pair breaking above the short-term resistance at 1.0550.
Upside Potential: A sustained move above 1.0600 could set the stage for further gains, potentially targeting the 50-day EMA at 1.0715. Breaking this level could validate a broader trend reversal and pave the way for a test of the 200-day EMA at 1.0834.
Downside Risks: On the downside, the MACD remains negative but shows signs of weakening bearish momentum. A failure to maintain the current rally could see EUR/USD revisiting support at 1.0500, with the critical 1.0450 low serving as a key threshold for bullish traders.
Key Levels to Watch:
Bullish Breakout: Daily close above 1.0600
Support Levels: 1.0500 and 1.0450
Resistance Levels: 1.0715 (50-day EMA) and 1.0834 (200-day EMA)
Market Sentiment
The EUR/USD’s performance hinges on Friday’s NFP data. A strong report could bolster the USD, potentially pressuring the pair back below 1.0550. Conversely, a weaker-than-expected NFP could fuel a risk-on rally, driving EUR/USD above 1.0600 and closer to 1.0700 in the near term. Traders should closely monitor the interplay between US labor data and ECB policy signals for the next directional move.
GBP/USD has recovered losses from the previous session, trading near 1.2770 during Thursday’s Asian session. The pair gains strength as the US Dollar (USD) retreats from a four-day winning streak, despite support from elevated US Treasury yields.
The US Dollar Index (DXY), which tracks the USD against six major currencies, hovers around 106.50. Meanwhile, yields on US 2-year and 10-year Treasury bonds are reported at 4.16% and 4.28%, respectively.
The USD faces headwinds as the latest US Consumer Price Index (CPI) data does little to deter speculation of a Federal Reserve (Fed) rate cut in December. According to the CME FedWatch Tool, there is nearly a 99% probability of a 25-basis-point rate reduction during the Fed’s December 18 meeting. Market participants now turn their attention to the US November Producer Price Index (PPI), set for release later on Thursday, for further direction.
In November, the US CPI rose to 2.7% year-over-year, up from 2.6% in October, aligning with expectations. Month-over-month, headline CPI posted a 0.3% increase, matching market consensus. Core CPI, excluding food and energy, advanced 3.3% YoY and 0.3% MoM, both in line with forecasts.
In the UK, the RICS Housing Price Balance jumped to 25% in November, up from 16% in October and exceeding the expected 19% increase. Published by the Royal Institution of Chartered Surveyors, this measure reflects a strengthening UK housing market, often viewed as a proxy for the broader economy.
The British Pound (GBP) benefits from growing market confidence in the Bank of England (BoE) maintaining its interest rate at 4.75% in December. BoE policymakers are widely expected to hold rates steady. Traders now shift their focus to the UK’s October monthly GDP data, scheduled for release on Friday, for additional economic cues.