Spectrum FX Daily Report

Last Friday’s US labour report was not a complete disaster, far from it, but investors latched onto the worse-than-expected unemployment number, sending the dollar lower against every other currency. Since then, the US dollar index has lost almost 3% of its value, sterling has risen back above the $1.15 mark, while EUR/USD is back trading above parity. So far, Tuesday’s US midterm elections have provided no assistance to the dollar, or any real volatility in currencies at all for that matter. As things stand, the Republicans look dead set to regain control of the House, with the Democrats expected to keep the Senate. We see this is as mildly bearish for the dollar, as it will make it challenging for President Biden to force through any meaningful spending increases in the next two years of his administration.

The second half of the week looks likely to remain a volatile one for currencies. Undoubtedly the most important data release on the economic calendar this week will be Thursday’s US inflation report. While markets are eying an easing in both the annual headline and core inflation numbers, price momentum looks likely to remain elevated. According to economists, the headline CPI number is set to have increase by 0.6% month-on-month in October, which would be the fastest pace of monthly price growth since March. We suspect that food prices will remain elevated, while gasoline prices are also set to have risen following the drop in that particular component in September.

Perhaps of even greater importance to the dollar will be the core US inflation print. So far, this indicator has not shown any signs of abating, and that will be a key cause for concern for Fed policymakers. Another surprise to the upside here (a common trend in recent months) could bring another jumbo US rate hike in December into view. Following last week’s FOMC meeting, markets ramped up expectations for hikes in 2023 though, at the time of writing, futures only see around a one-in-three chance of another 75bp move next month. This allows room for some upside potential in the dollar should the data once again exceed economists expectations.

One of the best performers in the G10 since Friday has been sterling, which has rallied by almost 4% since last week’s low. We largely attribute the move to US dollar weakness, rather than any improvement in sentiment towards the UK economy. Third quarter GDP data out on Friday morning is expected to show that Britain’s economy contracted by 0.5% in the three months to September, which the Bank of England warned last week could be the start of the longest recession on record. In the meantime, speeches from BoE members Haskel and Tenreyro will be closely watched.

This week has been a rather quiet one in terms of major developments in the Euro Area, and the euro has been driven almost entirely by the broad weakness in the dollar, which has allowed EUR/USD to rally back above parity for the first time this month. Tuesday’s retail sales print beat expectations (-0.6% MoM vs. -1.3% expected), but was resoundingly overlooked by markets. A handful of speeches from European Central Bank members, namely De Guindos, Panetta and Lane on Friday could prove market movers later in the week.

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