As strong consumer spending and ongoing inflationary pressures in the US reinforced the case for the Federal Reserve to continue being aggressive in its tightening drive, the dollar index broke above 111 and held a recent advance. Although investors would be watching for any dovish cues from Fed Chair Jerome Powell’s remarks after the meeting, it was highly believed that the central bank would increase rates by another 75 basis points beginning of November.
According to data released in October, the US economy expanded more than anticipated in Q3 following two consecutive quarters of contraction. This highlights the US economy’s adaptability to slowing global growth, fueling demand for haven assets like the dollar.
An increased risk appetite that made the US dollar less of a safe haven helped the euro rise for a second week against the greenback. The European Central Bank (ECB) increased rates by 75 basis points as anticipated by the markets, but in a more dovish manner, emphasizing rising recession fears that were hurting the euro.
Although the ECB is committed to fighting inflation with interest rate hikes, massive hikes of 75 basis points may have already ended. Due to this, financial markets reduced their expectations for rate hikes by as much as 27 basis points, anticipating a high of 2.65% next year as opposed to roughly 3% before the ECB’s statement. As a result, the euro suffered, which helped the GBP/EUR currency pair increase by more than 1% even as it struggled to remain above its 100-week moving average of €1.16.
According to a flash estimate from Eurostat, the European Union’s statistical office, annual inflation in the euro area was predicted to be 10.7% in October 2022, up from 9.9% in September. The general assumption is that the Eurozone will experience its first double-digit inflation and set a new high.
Even while there is still pressure on the ECB to maintain rate hikes, the high inflation levels across Europe continue to be a serious issue for these economies. They also cast a shadow over the economic outlook and, consequently, the euro’s appreciation. Meanwhile, a benefit of decreased consumer demand has been falling energy prices and relieving supply chain pressures.
The Bank of Japan raised its annual inflation forecast despite growing price pressures. However, the Japanese yen hovered close to around 146 to the dollar after it continued its ultra-low interest rate policy, a move that was largely anticipated. Nevertheless, in hopes that the US Federal Reserve will soon slow the rate of its rate increases, the yen maintained near its strongest levels in more than two weeks.
Japan’s reliance on imports from other countries also added pressure on the yen since businesses are compelled to buy more dollars to pay for imports.
Additionally, the yen rebounded strongly after falling to a 32-year low of 151.94, which analysts believe prompted the Japanese government to intervene again in the currency market. According to the Financial Times, the government most likely spent $30 billion on its most recent yen-buying operations. The two policy objectives of monetary easing to encourage wage growth and currency intervention to safeguard the yen, according to Finance Minister Shunichi Suzuki, are not in contradiction.
The Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr recently stated that while the country is in good financial and economic shape, inflation is still too high. In New Zealand, annual consumer prices increased 7.2% in Q3, dropping from a three-decade high of 7.3% in Q2 but far exceeding forecasts for a more pronounced decline to 6.7%.
The cash rate has increased by 325 basis points to 3.5% since the RBNZ announced a hawkish 50-basis point rate hike in October. Traders were left anticipating the release of the central bank’s biannual Financial Stability report on November 2 for information on the RBNZ’s tightening plans.
In addition, the Bank of Canada’s lesser rate hike boosted optimism that the US Fed Reserve would soon scale down its rate increases as the kiwi traded above $0.58, hovering at its best level in five weeks, despite a general decline in the US dollar’s value. The New Zealand dollar also strengthened after chief economist Paul Conway stated that the central bank is “hopeful” that inflation has peaked and expects “to see inflationary pressures easing going forward.”
After falling for three straight sessions, gold prices stabilized around $1,640 an ounce in October as traders refrained from placing large bets in advance of the highly anticipated US Federal Reserve meeting. As underlying inflation pressures in the US continue to be high, the metal has recently been under pressure from a rebound in the currency and Treasury yields, which has kept the Fed on track to raise rates by another 75 basis points beginning of November.
Markets will seek guidance on the Fed’s intentions for tightening, as a dovish surprise might boost gold prices. Even though gold is often regarded as a hedge against inflation and economic uncertainty, higher interest rates raise the opportunity cost of storing non-yielding gold, which diminishes its appeal. In contrast, retail gold prices in India continued to decline, contradicting a seasonal pattern as the country’s traditional gold buying season runs from October to December.
The US economy appears to be better prepared to take the shock of rising interest rates than, perhaps, the UK or Eurozone, given how resilient it has been and coming off a positive GDP result for Q3. The world’s largest economy’s inflation rate is still high, giving the Fed greater leeway to keep its tightening monetary policy for a while longer.
At the Jackson Hole symposium in August, Fed Chair Jerome Powell said: “Reducing inflation is likely to require a sustained period of below-trend growth.” However, monetary policy decisions will continue to be based on data, and with two more inflation and payroll reports due before the December meeting, the outlook may shift.
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