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The appreciation of the US dollar gained momentum
propelling the dollar-yen pair to regain strength within the 140 yen range in today's New York foreign exchange market.
“The appreciation of the US dollar gained momentum, propelling the dollar-yen pair to regain strength within the 140 yen range in today’s New York foreign exchange market”
It temporarily surged to the mid-140 yen level. Despite the presence of numerous sell orders around 140 yen, the market’s bullish sentiment was further fueled, leading to significant dollar buy-backs. If the dollar can sustain its position within the 140 yen range, there is a possibility of further advancing towards the mid-141 yen level, which will be closely monitored in the days ahead.
Today’s release of the US initial jobless claims data indicated a resilient US labor market, which appears to have contributed to the prevailing market conditions. As we approach key events such as the Federal Open Market Committee (FOMC), European Central Bank (ECB), and Bank of Japan policy meetings next week, the prevailing mood is favoring the unwinding of dollar shorts.
Expectations of a rate hike during the upcoming FOMC meeting are widespread. However, uncertainties loom beyond September, leaving the door open for additional rate increases or a possible decision to maintain rates unchanged. Meanwhile, the ECB, previously known for its hawkish stance, has slightly moderated its tone, signaling the potential for keeping options open, mirroring the Fed’s approach, regarding rate decisions in September. The Bank of Japan has also displayed a cautious approach, as suggested by Governor Ueda’s recent remarks.
In light of these developments, it appears that maintaining short positions on the dollar in the short term may not be the wisest strategy. Globally, as we approach the conclusion of the rate hike cycle initiated last year, market sentiment persists in the belief that shifting the focus from financial policy differentials to economic growth will enhance the dollar’s advantage.
The euro-dollar pair has witnessed a decline, hovering within the low 1.11-dollar range. Some analysts argue that the euro has been overvalued and could potentially weaken as it corrects to its short-term fair value. According to short-term fair value models, the euro-dollar pair still shows an overvaluation of approximately 2.5%.
Additionally, there have been reports indicating that ECB policymakers are contemplating a softening of their previously hawkish stance in the upcoming meeting, with suggestions that concerns about inflation among ECB policymakers may be easing to some extent.
Currently, the 21-day moving average stands at the low 1.10-dollar range, and while there is still some distance to cover, the market is closely monitoring the possibility of breaking through the 1.11-dollar mark in the near term.
As for the pound-dollar pair, the selling pressure on rebounds has intensified, leading to a temporary dip to around 1.2840 dollars. The 21-day moving average for today is situated around 1.2830 dollars, with indications of close observation at this level. The UK’s Consumer Price Index (CPI) released yesterday indicated lower-than-expected figures for both the overall and core indices, signaling a deceleration in inflation.
Despite this, service inflation, which the Bank of England closely monitors, remains at elevated levels, and the market maintains a significant probability of a substantial 0.50% rate hike during the Monetary Policy Committee (MPC) meeting on August 3. In the short-term financial market, a 0.25% point rate hike is almost certain, while the likelihood of a substantial 0.50% rate hike is currently hovering just under 50%.
In light of the prevailing circumstances, two previously hawkish economists, who had warned of the potential for policy interest rates reaching 7.00%, are now adjusting their outlook. However, they still recognize the necessity of a rate hike of at least 6.00%. On the other hand, considering the overall economic outlook, some economists view the market’s perception of the Bank of England’s rate hike as possibly exaggerated.
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