On Friday (December 2), the dollar index fluctuated and fell back in the week, and the trend will fall for two consecutive weeks. The dollar index fell mainly because the market believes that the Federal Reserve is expected to slow down the rate hike of rate hikes, while concerns about the epidemic have eased weakened demand for safe-haven dollars. But concerns about the global economic recession have always restricted the dollar's downward trend.
Other non-dollar varieties, euro fluctuated higher against the US dollar this week, mainly benefiting from the decline of the US dollar, and European Central Bank 's hawkish tone also supports the euro. The pound fluctuated against the US dollar this week, mainly benefiting from the weakening of the US dollar. Bank of England officials released hawkish tone and supported the pound
Next week, the market ushered in a series of important economic data from the United States, such as the US ISM non-manufacturing PMI, November PPI , etc. At the same time, the RBA and the Bank of Canada will also announce the interest rate resolution, and investors should pay close attention. Next, let’s take a look at the factors that affect the trends of several major currency pairs this week.
USD index fluctuates and falls this week, mainly due to the rising market expectations for the Fed to slow down interest rate hikes. US data this week is not conducive to the US dollar, but concerns about global recession always support the US dollar
chart: US index trend
Fed dovish tone speech pressure the US dollar to fall
Fed Chairman Powell said in his speech at the Brookings Institution that the Fed may raise interest rates moderately in the future. At the Federal Open Market Committee (FOMC) policy committee meeting held later this month, the Fed may be at the time to slow down the pace of interest rate hikes and will only raise interest rates slightly. This confirms that the Fed will not continue its current 75 basis point rate hike and may turn to a lower 50 basis point rate hike. According to the CMEFedWatch tool, the chances of the Fed's announcement of a 50 basis point rate hike at its December meeting are about 80%.
Federal Director Bowman said: We should slow down the pace of rate hikes. In addition, Fed Vice Chairman of Regulation Barr also said, "We may turn to a slower pace of rate hikes at the next meeting." It is worth noting that New York Fed Chairman Williams' recent remarks seem to be a test of the dollar shorts, because he said the Fed still has some way to go when it comes to rate hikes.
Federal Director Cook said the Fed may soon loosen the throttle in its efforts to lower high inflation levels. "Inflation is still too high, so the Fed must continue to focus on reducing inflation to 2%," Cook said in a speech for the Detroit Economic Club. "Given that the Fed is already brewing austerity policy, I noticed that the role of monetary policy has a long lag. As the Fed moves to an 'uncertain' end of interest rate hikes, it is prudent to take a small rate hike. How far will the interest rate hike policy go and how long it will last will depend on Economic progress observed in the Federal Reserve's reduction of inflation. "
The latest economic situation of the Federal Reserve " Beige Book " shows that compared with the previous report, overall US economic activity remained roughly flat or slightly higher, and interest rates and inflation continue to put pressure on economic activity, prompting low- and middle-income consumers to increasingly buy low-priced goods, and many people expressed greater uncertainty or pessimism about the outlook.
U.S. economic data performed well this week
Non-farm employment report performed well. Data shows that the U.S. non-farm employment population increased by 263,000 in November, an increase of 200,000, with the previous value being revised up from 261,000 to 284,000; the U.S. unemployment rate in November was 3.7%, in line with expectations and remained the previous value; the U.S. annual salary rate in November was 5.10%, significantly higher than the expected 4.6% and the previous value being 4.7%. Institutional comments on non-farm employment data in the United States: U.S. employment growth exceeded expectations in November, and wage growth accelerated compared with last month, suggesting that the job market is still very strong and the Federal Reserve needs to continue to curb inflation.
The inflation index that the Federal Reserve is concerned about has fallen. The U.S. Bureau of Economic Analysis announced on Thursday that the year-on-year increase of the U.S. personal consumption expenditure price index (PCE) in October fell to 6% from 6.3% in September, the smallest increase in since December 2021, lower than market expectations of 6.2%; a month-on-month increase of 0.3%, the same as September.The core personal consumer price index year-on-year growth rate dropped from 5.2% in September to 5%, in line with expectations; it rose 0.2% month-on-month and 0.5% in September.
Further details of this report show that personal expenditure and personal income in October rose 0.8% and 0.7% month-on-month , respectively, with personal income rising the largest increase in a year. Even though prices grow faster than wages, consumers are still buying more things even in terms of quantity. It's a real dilemma for the Fed's officials fighting inflation. The role of monetary policy is lagging, and although this may be only the early stages of monetary policy, consumer spending remains a sign that consumers are not affected by high inflation and interest rate hikes designed to control prices. So far, consumer endurance is incredible, but it is difficult for consumers to escape from the macro headwinds that plague other areas of the economy.
Data released by the U.S. Department of Labor on Thursday showed that as of the week ending November 26, the number of people applying for unemployment benefits for the first time was 225,000, better than the market's expectations of 235,000. The number of people applying for unemployment benefits in the United States has fallen, while the number of people applying for unemployment benefits has risen to its highest level since February, suggesting that it is harder for Americans who have lost their jobs to find new jobs in the cooling labor market. Economists have been paying more closely to the number of people applying for unemployment benefits in recent weeks, as it is an indicator of how difficult it is for people to find a job after they are out of work. They are also believed to imply an upcoming recession. Although the data has been rising over the past two months, it is still close to its all-time low.
In November, the US manufacturing economic activity shrank, and the ISM manufacturing PMI fell from 50.2 in October to 49, lower than the market expectations of 49.8. This is the first time that U.S. manufacturing has shrunk since May 2020 and the lowest reading since then. Commenting on the data, Timothy R.Fiore, chairman of the Manufacturing Inquiry Committee of the United States Supply Management (ISM), said, "As the company's committee members reported a decline in new order rates compared with the previous six months, the November comprehensive index reflects that companies are preparing for future output declines." In addition, the final value of the United States' S&P Global manufacturing PMI in November rebounded slightly to 47.7, better than the previous value of 47.6 and market expectations of 47.5.
The U.S. Bureau of Economic Analysis announced on Wednesday that the U.S. third-quarter GDP correction annualized rate was 2.9%, better than the initial value and market expectations of 2.6%. The Bureau of Economic Analysis explained in its report: "The second estimate mainly reflects the upward correction of consumer spending and non-residential fixed investment, partly offset by the downward correction of private inventory investment. Imports, as subtraction in GDP calculations, fell more than previous estimates."
epidemic concerns slowed down, China's economy performed better than expected, and risk aversion cooling pressure on the US dollar
It is reported that China may be preparing to modify its zero-COVID-19 policy. Shanghai, Guangzhou and several other cities are lifting some quarantine measures, although the number of cases is rising. Guangzhou has reportedly lifted all restrictions in several regions.
China's top official in charge of responding to the COVID-19 epidemic said on Thursday that China faces a "new stage and new mission" in epidemic prevention and control, suggesting that Beijing's zero COVID-19 policy may soften. Commentator said: Guangzhou has announced the lifting of all lockdowns. Beijing has been gradually lifting the lockdown over the past few days. Vice Premier Sun Chunlan on Wednesday officially pointed out for the first time that the pathogenicity of the virus is weakening and China is accelerating the lifting of large-scale lockdowns. "
China Caixin Manufacturing PMI unexpectedly rose, which also boosted market sentiment. Caixin China's manufacturing PMI rose to 49.4 in November, with an expected 48.9, and the previous value was 49.2. Although the Chinese authorities took extreme lockdown measures in November last year to curb the COVID-19 epidemic, China's economy performed better than expected.
However, the COVID-19 epidemic in major Asian countries is still severe. Japan Kyodo News reported on Thursday that the latest data released by the WHO showed that in the week from November 21 to 27, Japan added 698,772 new confirmed cases of new crown , an increase of 18% from the previous week, becoming the country with the largest number of new crown confirmed cases in the world for four consecutive weeks. At the same time, South Korea became the second largest country with the largest number of new crown confirmed cases in the world, and the third is the United States.South Korea's Central Epidemic Prevention and Measures Headquarters reported on Thursday that as of 0:00 on the same day, South Korea had 57,079 new confirmed cases of COVID-19 within 24 hours, with a single day drop of 10,366 new confirmed cases compared with the previous day, and the cumulative number of confirmed cases exceeded 27.15 million.
concerns about global recession always support safe-haven dollar
Citigroup economists predict in their latest annual outlook report that global economic growth will slow below 2% next year, consistent with the forecasts of major financial institutions such as Goldman Sachs , Barclays and JPMorgan . Citi economists point out that the ongoing challenges brought by the conflict between the new crown pneumonia and Russia-Ukraine are the reasons behind the above predictions.
Although Citigroup expects the U.S. economy to grow 1.9% this year, it is expected to fall by more than half to 0.7% next year. U.S. inflation is expected to grow by 24.8% year-on-year next year, and the final Fed interest rate is expected to be between 5.25% and 5.5%. Citi expects the UK and euro zone to fall into recession by the end of this year, as both economies face restrictions on energy supply and demand, as well as tightening currency and fiscal policy . The UK and the euro zone economies are expected to shrink by 1.5% and 0.4% respectively in 2023. Raphael Gallardo, chief economist at French asset management firm Carmignac, said in a webinar that the Fed will need to raise interest rates enough to trigger a recession to reduce inflation. Inflation in the United States is caused not only by high energy prices, but also by a strong labor market and solid consumer demand. The flexible and hot labor market in consumption will force the Fed to tighten monetary policy until it ensures there is a hidden momentum to pull down inflation. Since the actual wage of is "too high", the unemployment rate needs to be higher. If the financial environment in the stock market is too loose, the Fed may be forced to raise terminal interest rates to exceed the current pricing level of the bond market.
Market Analysis of the Future of the US dollar
Commerzbank Economists report that a possible rate cut by by the end of next year is the cornerstone of the weakening of the US dollar. Powell sounds a bit dovish, highlighting the high level of uncertainty in the inflation outlook and the risks that premature easing policy can pose. However, for now, the only thing that seems to be related to financial markets is that the Federal Reserve's monetary policy is "normalizing". The 75 basis points rate hikes taken to make up for the long hesitation in 2021 have become history. Monetary policy is turning to a more sustainable path. This means that if inflation drops sharply next year, concerns about the recession become a reality, and the market believes that there will be reason to cut interest rates again as early as the end of 2023, which is also the basis for our expectation of a weakening of the US dollar in the next year.
Mitsubishi UFAN Financial Group Economists report that a strong non-farm employment report is needed to reverse the decline in the US dollar. The lack of strong resistance to the relaxation of the financial environment has given market participants a green light to continue chasing recent high-risk trends, including a weakening of the US dollar. The latest U.S. economic data released recently also detrimental to the US dollar, indicating that the labor market growth momentum has been further lost and business confidence has been worrying. The developments have made the dollar desperate to release a strong non-farm jobs report on Friday to prevent further declines.
Euro against the US dollar fluctuated higher this week, mainly benefiting from the decline of the US dollar. The hawkish tone of the ECB also supports the euro
chart: Euro against the US dollar daily chart trend
Euro zone inflation fell but is still far higher than the target, supporting the ECB to increase its efforts to raise interest rates
0 Data released by the European Bureau of Statistics on Wednesday showed that euro zone inflation slowed beyond expectations in November, warming up market expectations that inflation had peaked. However, this also means that the ECB's anti-inflation action is about to enter a new stage and may make more controversial decisions on monetary policy.
data shows that the euro zone's CPI rose 10.0% year-on-year in November, lower than market expectations of 10.4%, and fell from 10.6% in October. In addition, the euro zone's CPI fell by 0.1% month-on-month in November, a sharp drop from the month-on-month increase in in October, and was lower than the market's expectations of 0.2% month-on-month increase.This is the first slowdown in euro zone inflation in a year and a half.
The price pressure in the euro zone appears to be showing weak signs of peaking, but it is worth noting that the euro zone inflation rate has remained at double-digits for two consecutive months, with the latest inflation rate still five times the ECB target (2%). ECB President Lagarde attempts to warn of possible "false dawn". "The potential pressure is still very high, and this fact will ease any feeling of relaxation," said senior economist Maeva Cousin. "While there are signs that the economy has fallen into a recession, the ECB's constant tightening
Confidence Index shows that the economy may not be as fragile as people fear, supporting the idea that the upcoming recession will not be severe enough to effectively curb inflation. Strong job markets and fiscal relief measures are supporting spending, analysts warn of potential risks of potential inflationary pressures.
Germany's largest trade union has won a salary increase of more than 5% in 2023 and more than 3% in 2024, plus a tax-free bonus of 3,000 euros. The latest compensation agreement adds reasons for concern, reflecting expectations for accelerating inflation in the future, as a sharp increase in compensation could exacerbate inflation, which was already at an all-time high.
Policy makers generally believe that the threat of a spiral of wage-inflation in the euro zone has been curbed. Even so, neither the ECB nor the EC currently predicts inflation will return to its target level of 2% in the next two years. They will release the latest forecast this month and provide forecasts for the first time in 2025. Although these predictions have become less important than they used to be, they still have some effect on the forecast of next year's outlook.
However, starting in December, the interest rate hike will be accompanied by an additional tightening of leverage as the ECB may begin discussing shrinking its balance sheet. At the same time, the economic situation is overwhelming, and the impact of past interest rate hikes (the ECB has raised 200 basis points this year) will eventually affect the uncertainty of consumers and businesses, which will make the situation even more complicated.
Since each rate hike requires a more accurate judgment on the economic impact and the conditions for financing , this entanglement will make it difficult for the relative consensus behind the ECB policymakers to reappear in 2023.
ECB President Lagarde stressed inflation risks and supported continued tightening
ECB President Lagarde said on Friday that inflation expectations should remain stable and the public needs to know that it will return to its target level. She noted: "In view of the current significant uncertainty, what we central bank governors have to do is actually implement monetary policies that anchor expectations so that these expectations remain in line with the goals. We need to signal the public, observers and commentators that in any case, inflation will return to our medium-term target in a timely manner." The market will closely monitor the ECB meeting to be held from December 14 to 15, when officials will decide whether to raise interest rates for the third consecutive time by 75 basis points or slow down to 50 basis points. Inflation in Europe slowed for the first time in a year and a half last month, which could provide support for a small rate hike.
Lagarde said earlier this week that she would be surprised if inflation in the euro zone has peaked. Meanwhile, some hawkish officials from the ECB have warned against ending actions to control inflation too early.
She also said on Friday that the prospects for some time will remain unclear and that Europe is going through a very challenging period and that the situation is changing. Furthermore, the impact of the dollar strengthening on the euro zone is less than that on emerging economies.
Regarding foreign exchange , Lagarde believes: "According to tradition, we do not set any exchange rate target, and we are closely monitoring exchange rate changes, especially the appreciation trend of the US dollar." She said that temporary, targeted and tailored fiscal policies can play an important role in alleviating the European energy crisis.
Lagarde said: Such policies will help alleviate the energy shock and limit inflation expectations.Fiscal policies that create excessive demand in supply-constrained economies may force monetary policy tightening beyond the necessary level, and unfortunately, some fiscal measures in many euro zone countries are currently pointing to the latter category rather than the former category.
pound volatility against the dollar this week, mainly benefiting from the weakening of the dollar. Bank of England officials released hawkish tone and spoke up for pound
chart: pound pound versus dollar daily chart trend
BOE officials said they would continue to raise interest rates to suppress inflation and support pound pound
0 BoE Deputy Governor Ramsden said the central bank must continue to raise interest rates and pull the inflation rate back to 2%, even if it means more difficulties for families. Ramsden said he expressed concerns about tight labor markets and high high inflation expectations and he tended to tighten policies further.
Since December last year, the Bank of England has raised interest rates eight times, raising interest rates to 3%, and at its November meeting, Ramsden also expressed support for the rate hike of 75 basis points. Currently, the market generally expects the Bank of England to raise interest rates by another 50 basis points in December. With inflation reaching 11.1%, more than five times the target level, the Bank of England is under pressure to actively respond to prices. However, given the imminent recession’s suppression of demand, the Monetary Policy Committee has differences on the intensity of further tightening of policies.
In November, two commissioners voted in favor of rate hikes at less than 75 basis points because they believed the cost of living crisis gave the Bank of England a reason to take a more gradual approach. Currently, the UK Government's Budget Responsibility Office expects UK household income to shrink by 7% over the next two years.
Rumsden said he was more concerned about the Bank of England's forecast that inflation will be below target in 2024 may exaggerate the degree of weakness in the economy amid the current continued tight labor market and rising inflation expectations. He is concerned about the “emergence and deep-rooted inflation mentality” and the rapid growth of wages than expected. Regardless of how challenging the short-term consequences are to the UK economy, the Monetary Policy Committee must take necessary measures in monetary policy to enable inflation to sustainably reach the 2% target in the medium term.
Official member of the UK Monetary Policy Committee said inflation has "increasingly deepened" the UK economy and the Bank of England must make a strong response. She believes inflation may now stabilize at 4%, a view that the Bank of England's own forecast of inflation falling back to 2.0% in three years. Before the epidemic, the inflation rate in the UK service industry was much lower than 2%, and now it is more than 3%. This is a huge change in the rate of potential inflation.
Mann has been urging other members of the Monetary Policy Committee to raise interest rates as soon as possible, as this will ensure inflation expectations are under control. She believes the risk of not doing so is that inflation expectations will continue to rise, leading to more rate hikes over the longer period of time. I have always tended to take a more positive attitude when voting, i.e., to guide the economy through more advanced bank rate adjustments.
She said that the Bank of England needed to raise interest rates further, but she did not specify whether she would vote to support a 50 basis point rate hike in December or another 75 basis points rate hike. "The risk of the Bank of England remains around its dovish tendency. Excessive focus on growth risks will raise markets' concerns that inflation may not be fully responded to. In the first quarter, inflation will remain in double digits."
market analyst Gary Howes said that if the Monetary Policy Committee agrees with Mann's assessment, the Bank of England could raise interest rates by another 75 basis points in December, raising bank interest rates to 3.75%. However, if the central bank only raises interest rates by 50 basis points, a lower-than-expected margin, the pound will weaken.
Bank of England's debt reduction operation supports pound
Bank will start selling purchased government bonds. The sell-off will be conducted in a “demand-led” manner, aiming to avoid market turmoil again following the historic plunge that began in late September. Considering that investors are already facing a large supply of government borrowings and the Bank of England holdings of bonds during the pandemic, this may be a new test of confidence.
NatWestMarkets UK interest rate strategy director Imogen Bachra said the actual operation of the market during and after these auctions remains to be seen. In a low-liquidity and still fragile market, the risk of yield will still be high as the Bank of England is rushing to sell its temporary holdings as soon as possible.
The Bank of England will provide long-term and index-linked gold-edged bonds based on market demand, which is different from other gold-edged bond sales operations with fixed funding quotas. Under the authorization of financial stability, the Bank of England purchased these bonds to avoid the so-called "sell" risk when pension funds scramble to meet the margin requirements.
This article is from Huitong.com
