Beijing time on Friday (November 11) in early Asian trading, the US dollar index rose slightly and is currently trading around 108.08. The dollar fell sharply on Thursday after U.S. consumer prices rose less than expected in October and signaled that core inflation had peaked, cheering data that could prompt the Federal Reserve to slow the pace of interest rate hikes.
The U.S. Labor Department said CPI rose 0.4% in October from the previous month, matching the previous month’s increase. Economists polled by the market had forecast a 0.6% rise in the CPI. Excluding the volatile food and energy components, the core CPI rose 0.3% month-on-month after rising 0.6% in September. The annual rate of inflation has moderated as last year’s sharp growth dropped out of the calculation. CPI rose 7.7% year-on-year in October, down from 8.2% in September, and headline inflation fell below 8% for the first time since February.
Lower-than-expected inflation helped the market, said Art Hogan, chief market strategist at B. Riley Wealth in New York. “Every metric in the report showed month-over-month and year-over-year improvements,” Hogan said. “Inflation is clearly heading in the right direction, which gives the Fed no reason to be more hawkish.”
“The CPI report reinforces the dollar’s selling momentum,” said Lee Hardman, currency strategist at MUFG in London.
The dollar has surged more than 16 percent this year, adding to Thursday’s losses. The yen and other currencies surged against the dollar, sparking speculation that the Bank of Japan would intervene, and analysts were skeptical.
George Goncalves, head of U.S. macro strategy at MUFG, said the dollar’s decline was due to lower bond yields. Everything is reacting to the big drop in interest rates that we are seeing. It’s always been a strong dollar move, and now people’s perception of the market has changed.
Fed funds futures forecasts for a peak in the Fed’s target rate fell to below 5%. The odds of the Fed raising rates by 50 basis points in December instead of 75 basis points rose to 71.5%.
Cleveland Fed President Mester said monetary policy needs to become more restrictive and remain restrictive for some time to put inflation on a sustainable downward trajectory toward the Fed’s 2 percent target.
The unexpected slowdown in headline and core CPI gains is further evidence that inflation has peaked, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities. While the Fed is still likely to raise rates by 50 basis points in December, there are doubts about raising rates in 2023 because history has shown that inflation has always fallen at the same pace as it has climbed before, LaVorgna said in a note.
Due to the sharp dive in the US dollar index, the pound against the US dollar soared more than 300 points to 1.1730 in the short-term on Thursday, and finally closed up 3.18% at 1.1714.
Capital Economics economist Ruth Gregory said in a note,The UK government looks set to unveil aggressive fiscal austerity measures in its autumn report on November 17, but the likely impact on sterling is unclear。While expectations that fiscal tightening will dampen economic growth should be negative for GBP, it will remove any residual concerns about fiscal health, which should have a positive impact on GBP.However, concerns about economic growth are more likely to dominate the pound as fiscal premiums have largely been lifted in the market since Chancellor of the Exchequer Hunt reversed many of the tax cuts introduced by the previous government.
As the dollar fell sharply, the euro rose sharply against the dollar on Thursday, hitting a high of 1.0221 at one point, and finally closed up 1.97% at 1.0209. However, the energy crisis and the continued recession in the euro zone may limit the euro’s gains.
Soaring energy prices will continue to weigh on spending and production, with economic activity in the euro zone likely to contract sharply in the third quarter of 2022, the ECB said.Eurozone economic activity is likely to slow significantly in the third quarter of 2022, with further weakness expected for the remainder of 2022 and early 2023. The ECB also said deteriorating terms of trade were weighing on euro zone incomes as prices of imports rose faster than exports.
Citi expects resilient growth in Italy, the euro zone’s third-largest economy, to end in 2023, contracting 0.8% in 2023 after growing 3.7% in 2022. Real incomes in Italy will fall further as the post-pandemic reopening is completed, the construction sector should cool and tighter financial conditions will start to take hold. The recession in Italy should last about three quarters, possibly already starting in the fourth quarter of 2022. The ECB’s tightening policy could ultimately create destabilizing risks for the Italian government bond market that could outweigh domestic political developments in Italy. The key priorities of the new right-wing government also represent a major uncertainty.
Citi economists said Spain’s current GDP is still a considerable distance from 2019 levels due to weak tourism, which could lead to stronger growth in 2022 and 2023 than the rest of the euro zone. The country’s GDP is expected to expand by 4.5% in 2022, followed by a modest contraction of 0.1% in 2023. Tighter financial conditions and weak manufacturing have led Flowers to revise its 2023 GDP forecast for Spain, which is not expected to introduce large-scale fiscal support.
European gas supplies look safer than expected this winter after major steps were taken to curb demand. But when the decline in energy use is the result of companies reducing their manufacturing output, this can negatively impact the economy. An example of this came on Thursday. Major steel producer ArcelorMittal said high gas prices forced it to cut gas consumption by 30%.
Due to the risk aversion caused by the collapse of the cryptocurrency and the sharp drop in the dollar, the dollar against the yen hit a low of 140.20 on Thursday, and finally closed sharply down 3.73% at 140.94.
On November 10, Bank of Japan Governor Haruhiko Kuroda said,Yen’s sharp unilateral decline appears to be halting since Japan intervened in FX. He also said that the recent weakening of the yen was bad for the economy and that the government’s response to speculation, sharp and unilateral declines in the yen was appropriate. In addition, the depreciation of the yen does not mean that the Bank of Japan should withdraw from the easing policy.
Hideo Kumano, an economist at Daiichi Life Economics Research Institute, said Japan has achieved some results in foreign exchange intervention. The Oct. 21 and 24 interventions went well, with officials moving quickly because they knew the impact would be weak if they waited until the Fed rate decision. Japanese officials have remained tight-lipped about their first intervention since September, partly keeping traders in the dark about their plans. The Japanese government has also taken clear action to show foreign traders that they cannot attack the yen at will.
Friday’s key data and outlook
Big things to watch on Friday: ECB Deputy Governor Jindos speaks, ECB Governing Holzmann speaks, BoE member Haskell speaks.
Summary of Institutional Views
1. MUFG: Potential split in US Congress could hit the dollar
① The U.S. mid-term elections may lead to divisions in Congress, which could have a negative impact on the dollar, which should help curb the risk of rising U.S. Treasury yields as it reduces the likelihood of further U.S. fiscal stimulus, and if the U.S. economy A deeper slump or recession would put more pressure on the Fed to ease monetary policy to support the economy, driving the dollar weaker;
②The votes are still being counted in the midterm elections, but Republicans are expected to win control of the House by a narrow majority, while the votes in the Senate are tight
2. Credit Faron: Sterling is not out of the woods yet, but volatility will ease
①Economists of Crédit de France are cautious about the recent trend of the pound. Lower UK sovereign credit risk, fading Brexit concerns and easing UK financial conditions are likely to keep sterling volatility lower in the near term. However, the latest developments do not mean that the pound is out of the woods. In fact, we think the aggressive fiscal austerity measures to be announced by Chancellor of the Exchequer Hunt next week will make an already weak UK economic outlook even worse;
② In the near term, however, the prospect of a sharp economic downturn may mean that the Bank of England will disappoint the still relatively hawkish market rate hike expectations.As such, Credit Fanon is cautious on the GBP outlook
3. Capital Economics: Sterling’s reaction to UK fiscal tightening expectations unclear
① Capital Economics economist Ruth Gregory said in a report that the British government appears to be releasing aggressive fiscal tightening measures in its autumn report on November 17, but the possible impact on the pound is unclear. While expectations that fiscal tightening will dampen economic growth should be negative for GBP, it will remove any residual concerns about fiscal health, which should have a positive impact on GBP;
② However, since the British Chancellor of the Exchequer Hunt reversed many of the tax cuts introduced by the previous government, the fiscal premium in the market has basically been lifted, so concerns about economic growth are more likely to dominate the trend of the pound
4. Tokyo Shinkin Asset Management Co.: USD/JPY’s recent high of 151.95 is increasingly likely to be a peak
① Japan has recently achieved success in cracking down on yen speculators, but challenges remain. Speculative positions in the foreign exchange market were curbed after Japan issued a threat and took concrete action on the foreign exchange market. The U.S.-Japan exchange rate has remained below the 150 mark in recent weeks due to reduced demand for the U.S. dollar;
② Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo, said Japanese officials have not let their guard down, but it is increasingly likely that they will get out of the woods. While the external environment is changing, they are lucky; as things stand now, it is increasingly likely that USDJPY’s recent high of 151.95 will be a peak.