Strong data, Fed’s hawkish remarks, and higher bond yields propped up the dollar last week. Which factors can move it around this week?
Here are possible themes:
Inflation reports (Oct. 11, 12:30 pm GMT)
Uncle Sam’s consumer prices missed analysts’ expectations last month, as healthcare and apparel prices dipped.
Fortunately, traders had their eyes on ECB’s policy decisions at the time, so the scrilla wasn’t hit too badly.
This week market players expect to see another 0.2% increase in headline CPI, while core CPI is expected to clock in at 0.2% in September after showing a 0.1% uptick in August.
Remember that U.S. bond yields have risen lately, which points to traders ditching U.S. bonds in favor of higher-yielding assets.
And with Fed head honcho Powell sharing optimistic remarks about the economy, investors are expecting to see faster inflation down the road.
A stronger-than-expected CPI reading would support last week’s speculations and likely push the dollar higher. Meanwhile, a weaker-than-expected release could lessen talks of an even more aggressive interest rate hike schedule from the Fed.
Make sure you stick around during the release!
FOMC member speeches
Governor Powell might not have a speech scheduled this week, but we do have three VOTING members sharing their thoughts over the next couple of days.
John Williams will talk monetary policy in Bali on October 10 at 1:10 am GMT.
If you recall, New York’s Fed boss recently hinted at more rate hikes when he shared that “we have a ways to go to get to some idea of what people think of as neutral” when asked about Uncle Sam’s neutral interest rate.
Atlanta’s Raphael Bostic will also take center stage in Atlanta on October 10 at 10:00 pm GMT and again in another event on Friday at 4:30 pm GMT.
Bostic, who admitted that he may have underestimated aggregate demand, also shared that “the potential for overheating would require a higher path for rates than what I had been thinking.”
Last but not the least is Randal Quarles, who will also make a speech in Bali on October 13 at 2:30 am GMT. Quarles is usually careful about sharing his stance on short-term monetary policy, but it will still be interesting to hear what he has to say about the economy.
Last Week’s Price Review
The Greenback is headed for its second week of net wins since the Greenback is currently on course to closing out the week in third place (as of 5:00 pm GMT).
And the Greenback’s strength was sustained this week, thanks largely to higher U.S. bonds yields and higher expectations for further Fed rate hikes, which put interest rate differentials into play, as well as highlighting the monetary policy divergence between the Fed and the other major central banks.
There were also other details, such as hawkish Fed rhetoric and mostly positive U.S. data, and you can read about them below.
The Greenback had a steady start, but demand was already notable since most USD pairs had a slight upward tilt. Also most USD pairs closed out the day above last week’s closing prices (dashed, horizontal line).
There weren’t really any direct catalysts, but market analysts were pointing to interest rate differentials and monetary policy divergence (in favor of the Greenback of course).
The Greenback then tried to climb at a faster pace on Tuesday, likely because of safe-haven demand due to the risk-off vibes at the time. However, buying pressure ran out of steam ahead of Fed Chair Powell’s speech.
Fortunately for USD bulls, Powell gave a rather optimistic speech, so the Greenback got bid higher again, but bulls quickly lost interest and the Greenback began trading sideways.
However, bulls began nibbling on the Greenback again come Wednesday. And as noted in Wednesday’s London session recap, market analysts were attributing the Greenback’s rise to Chicago Fed President Charles Evans’ optimistic assessment and outlook on the U.S. economy, as well as his comment that the Fed Funds Rate should climb to “a slightly restrictive setting” of around 3.0% to 3.25%.
But as you can clearly see in the overlay of USD pairs, the Greenback started climbing higher before Evans got to speak. U.S. bond yields were on the rise at the time, though, so I conjectured that the Greenback may have been supported by higher U.S. bond yields since higher U.S. bond yields mean higher inflation expectations, which higher odds of further hikes. And that, in turn, puts interest rate differentials and monetary policy divergence into play.
Incidentally, market analysts would later adopt the rise in U.S. bond yields as the dominant narrative for explaining the Greenback’s overall strength this week.
Getting back on topic, the Greenback continued to trend higher after that. And it probably helped that there were a bunch of mostly positive U.S. economic report and a bunch of mostly optimistic Fed Speakers during Wednesday’s U.S. session.
Fed Chair Powell’s speech, in particular, gave the Greenback a noticeable boost, likely because of these rather hawkish-sounding comments:
“The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. They’re not appropriate anymore.”
“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.”
The Greenback’s rally slowed after Powell’s speech, though. And bears even began to show up on some pairs come Thursday, likely because U.S. bond yields dipped, although profit-taking ahead of the NFP report is also a possible reason.
Speaking of the September NFP report, that revealed that only 134K non-farm jobs were created, well below expectations for a 185K increase and the weakest increase in about a year, so the Greenback reeled in pain as an initial reaction.
However, wage growth met expectations and the weaker-than-expected jobs growth was still enough to push the jobless rate down from 3.9% to 3.7%. Also, the NFP report noted that “Hurricane Florence affected parts of the East Coast during the September reference periods for the establishment and household surveys,” which implies that the September reading may be revised higher later, so bulls tried to fight back.
The fact still remains that jobs growth failed to meet the market’s expectations, though, so bears pushed back.
Unfortunately for USD bears, market analysts began pointing out that the disappointing NFP report was not enough to derail rate hike expectations since U.S. bond yields rose while stocks continued to bleed out.
The risk-off vibes did allow the yen and the Swissy to score wins against the Greenback, though.
A Bloomberg report, meanwhile, claimed that the E.U. is supposedly getting ready to present “an unprecedented ‘super-charged’ free-trade agreement” to the U.K., which allowed the pound to continue taking ground from the Greenback.