The US dollar remained relatively stable on Tuesday as traders assessed developments in the Middle East and prepared for speeches from central bank officials. Meanwhile, the pound experienced a slight dip following data indicating a softening labor market.
The yen briefly surged but quickly trimmed its gains after reports suggested that the Bank of Japan was considering raising its core Consumer Price Index (CPI) forecast for the 2023 and 2024 fiscal years while maintaining the inflation outlook for 2025. While the yen initially rose to 148.75 per dollar, it later settled at 149.47. Analysts believe that the kneejerk reaction to higher inflation forecasts in the near term was offset by longer-term projections.
Colin Asher, senior economist at Mizuho, stated that central banks are not attempting to meet their CPI targets in the near term. He also expressed concerns about the Bank of Japan underestimating the risks of the CPI remaining elevated into FY25, which could prompt the bank to tighten policy in the new year.
Investors are also watching for any signs of intervention by Japanese authorities since the yen is currently trading close to the 150 level, which prompted officials to buy the currency in 2022. Masato Kanda, Japan’s top financial diplomat, emphasized that despite recent weakness, the yen is still perceived as a safe haven asset, similar to the US dollar and the Swiss franc. Kanda also suggested that demand for the yen is being driven by the conflict in the Middle East.
The main drivers in broader currency markets continue to be tensions in the Middle East and elevated global bond yields, according to Valentin Marinov, Credit Agricole CIB global head of G10 FX research and strategy. Marinov added that the key question for the markets is the potential for further escalation. If oil prices remain stable despite geopolitical tensions, cost-push inflation may not accelerate, allowing the Federal Reserve to maintain its recent dovish rhetoric and avoid further rate hikes.
The US dollar index, which measures the currency against six peers, fell by 0.1% to 106.13 after dropping 0.4% on Monday.
Investor attention will be focused on Federal Reserve Chair Jerome Powell, who is scheduled to speak on Thursday. This week is also filled with speeches by regional bank heads. It is worth noting that Fed officials will enter a blackout period on October 21 before the central bank’s meeting on October 31 to November 1.
Federal Reserve Bank of Philadelphia President Patrick Harker expressed his opinion on Monday that the central bank should not increase borrowing costs and create additional pressure on the economy.
Based on the CME’s FedWatch tool, traders in Fed funds futures are currently pricing in around a 7% chance of a rate hike at the November meeting and a 35% chance of a hike by December.
In other currency news, the pound dipped after growth in British workers’ regular pay slowed down from a previous record high and job vacancies decreased. However, some labor market data, including the unemployment rate, has been delayed until next week.
Valentin Marinov of CA CIB stated that the slimmed-down version of the data indicates that the labor market is cooling down, supporting the view that the Bank of England has finished hiking rates.
The pound was last at $1.2174, down 0.4% for the day but up 0.6% on Monday.
The New Zealand dollar also fell by 0.6% to $0.5898 after data on Tuesday showed that consumer inflation hit a two-year low, reducing expectations that the central bank will further increase the cash rate in November.
Meanwhile, the euro rose by 0.1% to $1.0569 following news that German investor morale improved more than expected in October, according to the ZEW economic research institute.
The Australian dollar also rose by 0.2% to $0.6357 after the Reserve Bank of Australia’s minutes from its October 3 policy meeting revealed that the central bank considered raising rates but ultimately decided against it due to insufficient new information.
In conclusion, the US dollar remained stable as traders monitored developments in the Middle East and awaited central bank speeches. The pound dipped due to softening labor market data, while the yen briefly rose before settling. Geopolitical tensions and elevated global bond yields continue to drive currency markets, with the Federal Reserve closely watched for any signals on rate hikes. The New Zealand dollar fell after consumer inflation hit a two-year low, and the euro and Australian dollar experienced slight gains.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )