3 min to read
The New York foreign exchange market experienced a day of measured trading
characterized by the Dollar-Yen pair's steadfastness within the 147-yen range.
“The New York foreign exchange market experienced a day of measured trading, characterized by the Dollar-Yen pair’s steadfastness within the 147-yen range”
The morning brought the highly anticipated release of the US Consumer Price Index (CPI), which surpassed expectations, particularly in the month-on-month core index, eliciting a market response favoring the US dollar. Consequently, the Dollar-Yen pair briefly surged to approximately 147.75 yen. However, this surge was transient, and the overall market response remained constrained.
Today’s US CPI results have opened the door to the potential for additional rate hikes by the Federal Reserve (FRB). The core index, excluding food and energy, exhibited a 0.3% increase compared to the prior month, marking an acceleration since February. Furthermore, the comprehensive index, which includes food and energy, rose by 0.6% compared to the previous month, primarily propelled by the surge in energy prices, particularly gasoline. The Super Core index, excluding housing costs, a metric closely monitored by FRB Chairman Powell, also revealed a 0.4% month-on-month increase.
Collectively, these data points have surpassed initial expectations, intensifying anticipation of further rate hikes by the FRB within the short-term financial markets. Nevertheless, the market’s prevailing sentiment anticipates no alterations in the forthcoming Federal Open Market Committee (FOMC) meeting scheduled for next week, thereby maintaining the Dollar-Yen pair’s relatively tranquil trajectory.
Conversely, the Euro-Dollar market sustained its position near the 1.07-dollar threshold, regardless of the release of the US CPI today, which did not impart a definitive market direction. While the Euro-Dollar pair encountered some oscillations following the US CPI announcement, its primary range remained within the 1.07-dollar band.
Market attention has now shifted to the upcoming European Central Bank (ECB) Governing Council meeting. Recent expectations of rate hikes have surged, fueled by reports suggesting that the ECB foresees the Eurozone’s inflation rate surpassing 3% in 2024. In the short-term financial markets, the probability of a 0.25 percentage point rate hike has escalated to approximately 65%, compared to approximately 50% just a day earlier and less than 40% before that.
However, both the market and the ECB itself are grappling with uncertainty regarding the direction of the impending council meeting, resulting in a somewhat tumultuous environment. Hawks and doves both present compelling arguments. Hawks argue that it is unrealistic to expect inflation to fall below the 2% target without further rate hikes. The central bank deposit rate currently stands at 3.75%, indicating potential room for additional increases.
On the other hand, doves contend that inflation is trending in a favorable direction, and pausing rate hikes would provide an opportunity to assess their impact. The current economic landscape in the Eurozone is lackluster, with Germany poised for an economic downturn. Persisting with rate hikes at this juncture could exacerbate economic conditions, possibly subjecting ECB President Lagarde to criticism.
While the Pound-Dollar pair briefly dipped into the lower half of the 1.24-dollar range, it rebounded to approximately 1.25 dollars during New York trading hours. The 200-day moving average hovers around 1.2430 dollars, offering support at this level.
The release of the monthly UK GDP data for July unveiled a contraction worse than anticipated. Coupled with the previous day’s UK employment statistics signaling a weakening labor market, this GDP report has subdued expectations regarding a rate hike by the Bank of England (BoE). Nonetheless, inflation levels in the UK remain elevated, leaving the BoE with limited room for complacency.
The release of the monthly GDP data has further muddied the waters concerning the BoE’s future rate hike decisions, leaving its next course of action in a state of uncertainty.
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