BOE and BOC Rates Unchanged, U.K.s Labor Market Steady, Australia’s Inflation Elevated, Worries for U.S. Inflation Pressures, NFP Ahead

PREVIOUS WEEK’S EVENTS (Week 23 – 27 Oct 2023)

Announcements:

U.K. Economy

In the U.K. the unemployment rate held steady at 4.2%, lower than the previous figure of 4.3%. The Bank of England (BoE) is monitoring the labour market closely as it considers whether it needs to resume raising interest rates. A large majority of economists think the BoE will hold its Bank Rate at 5.25% on Nov. 2.

The Claimant Count (Change in the number of people claiming unemployment-related benefits during the previous month) was reported way higher than expected. A clear indication of the negative effect on employment from elevated borrowing costs.

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Inflation

Australia:

The CPI data for Australia’s 3rd quarter, plus yearly inflation data was surprisingly reported higher than expected creating problems for policymakers who do their best to fight inflation and desire lower figures instead.

The annual pace of inflation slowed to 5.4%, from 6.0%, but was again above forecasts of 5.3%. For September alone, the CPI rose 5.6% year-on-year, up from 5.2% in August.

United States

The increase in the PCE price index monthly figure was reported higher, 30% vs 0.10%.

U.S. consumer spending surged in September keeping spending on a higher growth path heading into the fourth quarter. Spending is, however, seen cooling off in early 2024 leaving economists convinced the Federal Reserve is done raising interest rates.

Monthly inflation readings of 0.2% on a sustainable basis are needed to bring inflation back to the U.S. central bank’s 2% target, according to economists. The core PCE price index rose 3.7% on a year-on-year basis in September, the smallest gain since May 2021, after increasing 3.8% in August.

The Fed tracks the PCE price indexes for monetary policy. It is expected to leave interest rates unchanged next Wednesday as a recent surge in the U.S. Treasury yields and stock market sell-off have tightened financial conditions. Thus, the probability of keeping rates unchanged is now estimated to be over 90%. But risks of a rate hike remain.

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Interest Rates

Bank of Canada

The Bank of Canada decided to keep its key overnight rate at 5.0% as expected and have a minimal impact on the markets. The bank increased rates 10 times between March 2022 and this July.

Inflation in September dipped to 3.8% from 4.0% in August and it is expected to return to the 2% target by the end of 2025.

European Central Bank

The European Central Bank (ECB) left interest rates unchanged as expected. The record-high borrowing costs had the desired but heavy effect on business conditions, enough for the ECB to pause for now.

Inflation is significantly lower than last year, while the economy has slowed so much that a recession may be underway, making further hikes unlikely.

The ECB President Christine Lagarde kept a further rise in rates on the table as a distant possibility.

Markets now see a high chance the ECB will start cutting interest rates in April and fully price in a move by June, followed by two other cuts before the end of the year.

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Sources:

https://www.reuters.com/markets/rates-bonds/ecb-hold-rates-may-discuss-quicker-bond-portfolio-run-off-2023-10-25/

https://www.reuters.com/world/uk/uk-unemployment-rate-holds-42-ons-2023-10-24/

https://www.reuters.com/markets/australia-inflation-surprisingly-strong-q3-adds-rate-risk-2023-10-25/

https://www.reuters.com/markets/us/us-consumer-spending-beats-expectations-september-2023-10-27/

https://www.reuters.com/markets/bank-canada-leaves-rates-hold-sees-weak-growth-stubborn-prices-2023-10-25/

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Currency Markets Impact – Past Releases (Week 23 – 27 Oct 2023)

Server Time / Timezone EEST (UTC+02:00)

 

The Eurozone’s Consumer Confidence figure was reported the same as expected, -18, indicating the same pessimism about economic conditions. No major impact was recorded upon release.

PMI releases for both the Manufacturing and the Services sector:

Eurozone

The French economy starts the fourth quarter with contraction. Another solid reduction in business activity across the eurozone’s second-largest economy in October. The Manufacturing PMI figure is the worst reported at 42.6 points while the services PMI showed some improvement but was still below the 50 threshold. Demand weakness, new orders fell markedly and for a sixth successive month. Sales to non-domestic customers plummeted.

The German economy also remained in contraction in October. Manufacturing PMI still reported at low levels close to 40, while the services sector activity remained close to 50, although October also saw a renewed decline in services business activity since the PMI was reported at 48 versus the previous 50.3 points.

The Eurozone downturn deepened in October. The economic downturn accelerated at the start of the fourth quarter. Manufacturing PMIs reported low at 43 points while the services sector PMI was reported at 47.8 points also in the contraction area.  Private sector output is declining at the steepest rate. New orders fell at an accelerating rate as well, a worsening demand environment.

United Kingdom

PMIs for the U.K. were also reported disappointing and in contraction. Ongoing weakness in the UK service sector adds to the case for policymakers to keep rates on hold for a second time. The U.K. private sector output declined for the third month running in

October. Also saw reductions in new order volumes and staffing numbers at private sector firms.

United States

The Manufacturing PMI figure was reported to be 50 points, an improvement from the previous figure. The Services sector PMI was reported just above 50 as well. These data suggested a marginal expansion in business activity during October. Manufacturers and service providers alike reported improved activity levels despite the moderate downturn in demand and with inflationary pressures to have eased in October.

The Claimant Count Change (Jobless claims) was remarkably reported at 20.4K versus the expected increase of just 2.3K. On the other hand, the Unemployment Rate improved to 4.20% against the previous 4.30%. At the time of the release, no significant shock was recorded affecting GBP

The Richmond Manufacturing Index was reported lower as expected. No significant impact was recorded having an effect on USD p

Australia’s inflation figures were reported higher than expected. The market experienced a shock with the AUD appreciating for a while but soon the effect reversed. The AUDUSD jumped 40 pips at the time of the CPI data release and it steadily moved to the downside soon after retracing back to the mean.

The German Ifo business climate report showed improvement in morale, more than expected in October, following five consecutive months of decline. The Ifo Institute said its business climate index stood at 86.9 versus the 85.9 reading forecast by analysts. No major impact was recorded affecting the EUR.

The Bank of Canada (BOC) decided to keep the overnight interest rate unchanged. Unexpectedly the impact in the market was minimal at the time of the release. The CAD experienced slight depreciation against other currencies but it soon faded.

The U.S. New Home Sales figure was reported at the same time. A higher-than-expected figure of 759K showed a jump in sales that caused the USD to appreciate moderately at the time of the release.

The European Central Bank (ECB) decided to keep rates unchanged. The MRR remained at a record 4%, from below 0% in July 2022, as inflation slows and economic conditions are in deterioration. The EUR experienced a shock and depreciated momentarily but soon the effect was reversed. EURUSD dropped nearly 10 pips before reversing fully back to the mean at the time of the release.

Weekly unemployment claims for the U.S. were reported as expected close to the 200K level, actually at 210K. No surprises here and no major shocks for USD

The U.S. Advance GDP showed a higher figure for the quarter. The USD appreciated at the time of the release, experiencing a small shock. The EURUSD dropped nearly 20 pips at that time but the effect was reversed quickly after and so the pair as well.

Durable goods orders were reported 4.7% higher in September, compared with the 1.7% increase expected and the 0.1% decline (revised from +0.2%) in August. Another factor that caused the USD to appreciate at the time of the release, even momentarily.

Inflation was reported to be elevated for Tokyo. It unexpectedly quickened for the first time in four months in October, indicating that inflation is proving stickier than expected. No major market impact was recorded at the time of the release.

The PCE data was released as expected. After the release, the USD weakened for some time. The DXY found support soon near 106.4 before retracing to the mean. It returned to the upside after the Revised UoM Consumer Sentiment report showed a higher-than-expected figure, 63.8 vs 63.

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FOREX MARKETS MONITOR

DXY (US Dollar Index)

The dollar index rapidly moved to the upside last week. It crossed the 30-period MA on its way up and found resistance before eventually retracing. The Fibo tool shows that the retracement back to 61.8% of the move is complete as the USD weakens currently.

EURUSD

The EURUSD dropped instead, the chart mirrors the DXY chart because the USD appears to be the main driver. The dollar was gaining strength at the beginning causing the EURUSD to drop. The reversal followed with the pair moving to the upside after the 26th Oct. The pair is currently breaking resistance levels and looks for more upside movement. Until the NFP at least.

CRYPTO MARKETS MONITOR

BTCUSD

Bitcoin and several cryptocurrencies and related stocks such as Coinbase Global (COIN), Marathon Digital Holdings (MARA), Riot Platforms (RIOT) and Microstrategy (MSTR) experienced a surge in value after a U.S. appeals court ordered the Securities and Exchange Commission to review Grayscale’s application for a spot Bitcoin ETF. Bitcoin has moved significantly to the upside breaking all important resistance levels reaching even until near the level of 35,200 USD, clearly visible on the chart on the 24th Oct. That was the level at which the rapid surge in price finally ended with its price soon retracing back to the 30-period MA. Bitcoin remains in consolidation and with low volatility levels, having 35000 USD as an important resistance level. Fundamentals remain the key factors that push the price to deviate significantly from the mean. Important resistance remains at the 35200 USD level.

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NEXT WEEK’S EVENTS (Week 30 Oct – 03 Nov 2023)

This week we have rate decisions: BOJ, FED, BOE.

NFP week with important employment data releases for the U.S., New Zealand and Canada.

 

Currency Markets Impact:

On the 31st Oct, the Bank of Japan will decide on interest rates. The usual expectation is in place of no change, leaving the policy rate at -10%. No major impact is expected at the time of the release.

Core CPI and CPI Flash Estimates figure releases are expected to cause increased volatility levels but moderate for the EUR

CAD pairs might experience some small intraday shock at the time of the GDP release. The figure is expected to be reported higher.

The employment cost index and CB consumer confidence report could shake the USD

Late at 23:45, the New Zealand Labour data might cause moderate shock affecting the NZD pairs at the time of the release. There is less activity at that time in general but the data are important for policymakers, thus increasing the probability of a shock happening upon release.

The ADP NF Employment change and JOLT Job openings are considered important data, released on the 1st Nov this time. The USD pairs might see high volatility and even intraday shock upon release. Moderate activity is expected since the market usually reacts heavily during the NFP instead.

The Fed will decide on rates at 20:00. Important announcement, however, the announcement is already priced-in since there is a high probability that expectations will be met of unchanged rates, an intraday shock is possible and USD pairs could be affected greatly, especially during the press conference at 20:30

Another rate decision by the BOE on the 2nd Nov. GBP pairs are expected to be affected even if the actual result will meet expectations, unchanged rates. With such a policy though, inflation is hard to be brought down.

On the 3rd of Nov, the Canada Labor data will be reported at 15:30 along with the NFP and U.S. Unemployment rate. CAD and USD pairs will probably be affected greatly upon release. With elevated rates, Americans expect lower employment change. The same holds for Canada.

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COMMODITIES MARKETS MONITOR

U.S. Crude Oil

Crude remains in consolidation and in a range that has support near 82.5 USD/b while resistance is near 85.5 USD/b as the peaks suggest. It is moving with high volatility sideways around the mean currently and is heavily affected by the fundamentals. War-related: The Gaza war rages currently. Israeli forces expand ground operations.

Gold (XAUUSD)

The price of gold moved to the upside as mentioned in our previous report. Gold jumped over the 2000 USD/oz reaching the resistance near 2009 USD/oz before it retraced to the mean after the market opening today. The risk-off mood is still on as war is ongoing. Gold performance is over 8% for this month so far.

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EQUITY MARKETS MONITOR

NAS100 (NDX)

Price Movement

The index tries to recover from the massive drop since the 25th Oct. It found strong support currently at near 14070 USD and remained close to the 30-period MA without experiencing for now any other sudden moves to the downside. Other benchmark U.S. indices have actually experienced more movements to the downside instead. Risk-off mood.

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