Spectrum FX Daily Report

2022 thus far has been one of the best years for the dollar since the mid-1990s, though signs that US inflation is finally trending downwards has led to a sharp retracement in the currency in the past week, as markets bet that a dovish pivot from the Federal Reserve may not be too far away. The US Dollar index was trading more than 5% lower for the month at one stage yesterday, with the greenback losing ground against every other major G10 currency, and almost every emerging market one, since the start of November. Indeed, most of these losses have been incurred in the past four trading sessions alone, marking one of the worst weeks for the dollar since the signing of the Plaza Accord in 1985.

A broad improvement in risk sentiment has further supported risk currencies in the past few days, at the expense of the US dollar. Headlines out of China have largely taken a turn for the better. Authorities there seem to be adopting a slightly more relaxed approach towards the COVID-19 virus, while also appearing open to the use of western vaccines, which have proved far more effective than the domestically produced Sinovac. An apparent easing in tensions between the US and China following promising headlines out of the Biden-Xi meeting has also buoyed risk assets, as has Russia’s withdrawal from Kherson in Ukraine. These have been particularly encouraging developments for emerging market currencies - the MSCI EM currency index is now trading around 3% higher in the past fortnight.

EUR/USD is back trading comfortably above parity, briefly rallying above the 1.04 mark on Tuesday - its highest level since July. While most of the move has clearly been driven by the broad weakness in the dollar, signs that the pending downturn in Euro Area growth may not be as bad as initially feared has also buoyed the common currency. Macroeconomic data out of the bloc so far this week has been encouraging. September industrial production beat expectations on Monday, rising by 0.9% on the month (+0.3% consensus), while there was also an upward revision to the August data. Meanwhile, yesterday’s ZEW economic sentiment print smashed expectations, with the index rising to -38.7 this month, much higher than the -67 priced in.

Meanwhile, sterling jumped to its strongest position on the dollar since August at one stage on Tuesday, advancing above the 1.20 threshold. Again, this was driven largely by the sell-off in the dollar, though GBP managed to outperform most of its major peers yesterday. This morning’s UK inflation data for October will be watched very closely by market participants. Another blowout report is expected, which would heap extra pressure on the Bank of England to continue delivering aggressive policy tightening at upcoming MPC meetings. We will also be paying close attention to Thursday’s fiscal announcement, notably how PM Sunak and Chancellor Hunt plan to tackle the UK’s sizable budget shortfall. Expect volatility the remain high during the remainder of the week.

For a live rate or to book a trade please contact us.

T: +44 203 440 7550 | E: [email protected] | W: www.spectrumfx.co.uk