Forex

Euro zone inflation dents euro, dollar rises from three-month low

Published

11 months ago

November 30, 2023

Euro zone inflation dents euro, dollar rises from three-month low

By Samuel Indyk

LONDON (Reuters) -The euro fell on Thursday after euro zone inflation eased by more than forecast this month, fuelling bets of early European Central Bank rate cuts, while the dollar rose from a three-month low but was still set for its biggest monthly drop in a year.

Consumer price growth in the 20 nations that share the euro currency dropped to 2.4% in November from 2.9% in October, well below expectations for a fall to 2.7%.

“The message from today’s European CPI data is clear,” said Matthew Landon, global market strategist at J.P. Morgan Private Bank. “Disinflation is continuing at a rapid pace in Europe – and, importantly, more swiftly than the market or even the ECB’s expectations.”

“Falling inflation and a stagnant economy could justify ECB cuts as soon as the first quarter of next year in our view,” Landon said.

The euro dropped as much as 0.5% against the dollar to $1.0910 and last stood at $1.0930. On Wednesday it hit its highest level since August at $1.1017.

Markets are now fully pricing in a rate cut from the ECB by April, while around 115 basis points of easing is priced by the end of next year.

ECB policymaker Fabio Panetta said on Thursday the central bank may be able to ease monetary conditions if persistently weak output accelerates the decline in inflation.

Meanwhile, the , which measures the U.S. currency against six others including the euro, rose 0.4% to 103.25, picking up after touching 102.46 on Wednesday, its lowest level since Aug. 11.

The index is still down around 3.3% in November, its biggest monthly fall since last November, on growing expectations the Fed will also cut interest rates in the first half of 2024.

“The key drivers in November for the dollar weakness have been the benign inflation data and the loosening signs of the labour market,” said Mohamad Al-Saraf, associate, FX and rates strategy at Danske Bank.

“The notion of a soft landing has increased and usually that’s a bad environment for the dollar.”

Investors will be all ears on Friday when Fed Chair Jerome Powell takes centre stage in the wake of Fed Governor Christopher Waller on Tuesday flagging a possible rate cut in the months ahead. It will also be the last time Fed policymakers will be able to share their views before they enter the quiet period before the December policy meeting.

Before that, the spotlight will firmly be on Thursday’s crucial personal consumption expenditure (PCE) price index – the Fed’s targeted measure of inflation.

Christopher Wong, currency strategist at OCBC, said the data will offer a glimpse into whether the disinflation trend seen so far remains intact.

“If core PCE undershoots expectations to the downside, then USD may extend the move lower again,” he said.

U.S. rates futures markets are now pricing in more than 100 bps of rate cuts next year starting in May, and the two-year Treasury yield is close to its lowest since July – it has slumped about 40 bps this week alone.

Meanwhile, expectations that the Bank of Japan will soon end its negative rate policy have pulled the yen up from the depths, and in the process, eased pressure on the central bank to support the currency via direct FX market intervention.

On Thursday, the yen weakened 0.2% to 147.575 per dollar, but remains close to the two-and-a-half-month high of 146.675 per dollar it touched on Wednesday. The Japanese currency has firmed almost 3% against the dollar in November and is on course for its strongest month this year.

Bank of Japan board member Toyoaki Nakamura said on Thursday the central bank will likely need some more time before phasing out its massive stimulus.

Sterling was last at $1.2655, down 0.3% on the day, while the Australian dollar fell 0.2% to $0.6605. It’s still up 4.2% in November – its steepest one-month gain in a year.

Forex

US dollar gains as US election draws nearer – UBS

Published

12 hours ago

October 17, 2024

Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.

A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.

“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.

Where does this leave us now with our USD views?

Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.

Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .

The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.

Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.

Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.

With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.

At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.

Forex

Sell euro rallies around the ECB meeting – Citi

Published

12 hours ago

October 17, 2024

Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.

Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.

“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.

That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”

There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.

“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”

At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.

Forex

Dollar gains on trimmed rate expectations; sterling weakens post inflation

Published

12 hours ago

October 17, 2024

Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.

At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.

Dollar helped by trimmed rate cut expectations

Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.

Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.

Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.

Sterling slumps after inflation release

In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.

The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.

This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.

“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.

“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”

traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.

The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.

“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.

Yuan nurses weekly losses

fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.

China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.

rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.

data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.