Powell supported the US dollar. Overview of USD, EUR, GBP
October 24, 2023 3:22 am
Last week, Federal Reserve Chair Jerome Powell spoke at the Economic Club of New York, with the key theme of his speech being that the FOMC is “proceeding carefully”. The markets inferred from his speech that the expected rate hike in November likely won’t happen and, there’s a good chance that it may not happen at all, given the signs of slowing inflation.
At the same time, Powell suggested the US central bank is inclined to hold interest rates at a high level for a longer period than previously thought because “the evidence is not that policy is too tight”. Yields at the long-end rose quickly after Powell’s remarks, with the yield on the benchmark 10-year Treasury crossing 5%, pulling the entire global bond market along with them.
Rapidly rising yields in the bond market have been pressuring stock prices, and this indicates an increased demand for cash, providing support for the US dollar. It’s also worth noting that the 5-Year TIPS/Treasury Breakeven Rate jumped to 2.52% after Powell’s speech, the highest since March. This signifies a sharp rise in business’s inflation expectations.
The net long USD position increased by 227 million to 8.7 billion during the reporting week. While purchases of USD have clearly slowed down, the bullish bias remains intact.
A sharp increase in long positions in gold has drawn attention. Over the week, the net long position increased by $8.4 billion to $21.682 billion, marking the largest weekly gain in gold in over a year. This is likely a reaction to the military actions in the Gaza Strip. The purchase of gold as the primary antagonist to the USD has not yet triggered selling, but the chances of a further USD rise have diminished somewhat.
We expect that demand for the US dollar will strengthen again after a brief stabilization, providing an additional boost to the bullish trend.
EUR/USD
The European Central Bank will hold its next monetary policy meeting on Thursday. It is expected that, for the first time since July, the interest rate will remain unchanged, as the inflation and economic growth data published after the previous meeting were in line with expectations. The ECB’s guidance on this matter has been clear and unambiguous – there is no need for further rate hikes at this stage.
Futures on the ECB rate suggest that there will be no changes in the next six months, with the end of the second quarter marking the beginning of a slow downward cycle. Accordingly, even maintaining the current level of rates means maintaining the yield spread in favor of the dollar, especially real inflation-adjusted yields, which will exert pressure on the euro in the long term.
The net long EUR position increased by $883 million to $10.896 billion over the reporting week. This marks the first euro increase since August. The price is still below the long-term average and is heading downwards.
EUR/USD is trading in a narrow range, with the bearish bias intact, but the probability of a bullish correction has increased. The nearest resistance level is 1.0640, and if the price stays above this mark, the euro may correct higher as it moves towards the 1.0760/70 resistance area. However, take note that bearish pressure could resume at any time, and if the price breaches the support level at 1.0445, the pair could drop to 1.0200.
GBP/USD
In the UK, inflation remained stable at 6.7% YoY in September. The core index decreased from 6.2% to 6.1% YoY, but exceeded forecasts by 1 point. Inflationary pressures continue to be strong, but it is expected to fall to 5% in October as the price cap on energy costs set by OfGEM for 2022 comes into effect.
The expected fall in inflation implies an expectation of around 5%, and this is the main reason why the markets do not expect a Bank of England rate hike at the upcoming meeting on November 2. Accordingly, the yield spread remains the primary driver of pressure on the exchange rate, at least not shifting in favor of the pound, indicating sustained downward pressure.
The net short GBP position increased by $82 million to -$853 million over the reporting week. The positioning is moderately bearish. The price is significantly below the long-term average, but the rate of decline has clearly slowed, increasing the likelihood of a corrective rise.
The pound is trading slightly above the 1.2033 low, and the bulls don’t have enough strength to develop a full-blown correction. The most likely scenario is sideways trading with a break below. The nearest resistance area is at 1.2220/40, followed by the local high at 1.2337. We can expect a more pronounced correction if the price manages to stay above these levels. If the pair manages to breach the support level at 1.2033, this would open the path to 1.1740/90.
The material has been provided by InstaForex Company – www.instaforex.com
Last week, Federal Reserve Chair Jerome Powell spoke at the Economic Club of New York, with the key theme of his speech being that the FOMC is “proceeding carefully”. The markets inferred from his speech that the expected rate hike in November likely won’t happen and, there’s a good chance that it may not happen at all, given the signs of slowing inflation.
At the same time, Powell suggested the US central bank is inclined to hold interest rates at a high level for a longer period than previously thought because “the evidence is not that policy is too tight”. Yields at the long-end rose quickly after Powell’s remarks, with the yield on the benchmark 10-year Treasury crossing 5%, pulling the entire global bond market along with them.
Rapidly rising yields in the bond market have been pressuring stock prices, and this indicates an increased demand for cash, providing support for the US dollar. It’s also worth noting that the 5-Year TIPS/Treasury Breakeven Rate jumped to 2.52% after Powell’s speech, the highest since March. This signifies a sharp rise in business’s inflation expectations.
The net long USD position increased by 227 million to 8.7 billion during the reporting week. While purchases of USD have clearly slowed down, the bullish bias remains intact.
A sharp increase in long positions in gold has drawn attention. Over the week, the net long position increased by $8.4 billion to $21.682 billion, marking the largest weekly gain in gold in over a year. This is likely a reaction to the military actions in the Gaza Strip. The purchase of gold as the primary antagonist to the USD has not yet triggered selling, but the chances of a further USD rise have diminished somewhat.
We expect that demand for the US dollar will strengthen again after a brief stabilization, providing an additional boost to the bullish trend.
EUR/USD
The European Central Bank will hold its next monetary policy meeting on Thursday. It is expected that, for the first time since July, the interest rate will remain unchanged, as the inflation and economic growth data published after the previous meeting were in line with expectations. The ECB’s guidance on this matter has been clear and unambiguous – there is no need for further rate hikes at this stage.
Futures on the ECB rate suggest that there will be no changes in the next six months, with the end of the second quarter marking the beginning of a slow downward cycle. Accordingly, even maintaining the current level of rates means maintaining the yield spread in favor of the dollar, especially real inflation-adjusted yields, which will exert pressure on the euro in the long term.
The net long EUR position increased by $883 million to $10.896 billion over the reporting week. This marks the first euro increase since August. The price is still below the long-term average and is heading downwards.
EUR/USD is trading in a narrow range, with the bearish bias intact, but the probability of a bullish correction has increased. The nearest resistance level is 1.0640, and if the price stays above this mark, the euro may correct higher as it moves towards the 1.0760/70 resistance area. However, take note that bearish pressure could resume at any time, and if the price breaches the support level at 1.0445, the pair could drop to 1.0200.
GBP/USD
In the UK, inflation remained stable at 6.7% YoY in September. The core index decreased from 6.2% to 6.1% YoY, but exceeded forecasts by 1 point. Inflationary pressures continue to be strong, but it is expected to fall to 5% in October as the price cap on energy costs set by OfGEM for 2022 comes into effect.
The expected fall in inflation implies an expectation of around 5%, and this is the main reason why the markets do not expect a Bank of England rate hike at the upcoming meeting on November 2. Accordingly, the yield spread remains the primary driver of pressure on the exchange rate, at least not shifting in favor of the pound, indicating sustained downward pressure.
The net short GBP position increased by $82 million to -$853 million over the reporting week. The positioning is moderately bearish. The price is significantly below the long-term average, but the rate of decline has clearly slowed, increasing the likelihood of a corrective rise.
The pound is trading slightly above the 1.2033 low, and the bulls don’t have enough strength to develop a full-blown correction. The most likely scenario is sideways trading with a break below. The nearest resistance area is at 1.2220/40, followed by the local high at 1.2337. We can expect a more pronounced correction if the price manages to stay above these levels. If the pair manages to breach the support level at 1.2033, this would open the path to 1.1740/90.
The material has been provided by InstaForex Company – www.instaforex.com
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