Forex daily: dollar weakens to three-month low

Forex daily: dollar weakens to three-month low

Proactive Investors - The dollar index weakened to a three-month low this morning.

Analysts at Deutsche Bank (ETR:DBKGn) said the decline also reflected the further unwinding of the “risk premium buoying the greenback” – or (maybe) in other words, people are less worried about risk, or at least that the USD is no longer the best means of hedging risk.

At ING Bank, forex analyst Chris Turner said a further unwinding of long dollar positioning “remains the risk, but we think the dollar is getting close to some decent support levels”.

Neil Wilson at Markets.com offered this: "The softer dollar continues to offer support to risk…everyone eyeing the equity market run-up into the year-end. One thing on the dollar is that if the Fed does slow this might provide cover for other CBs to slow, not least as dollar strength has been important factor in importing inflation."

Pressure still on the dollar: Sterling pushed up to a fresh three-month high at 1.2150 amid thinnish trade, before paring gains back below $1.21 this morning. The move higher ran out of steam short of the 200-day line and we might expect the next drive higher to take this level around 1.2180. The yen meanwhile has come back a bit after USDJPY tested 138.0 yesterday. The euro continues to trade above $1.04, above the 200-day line, which offers support now – need to see weekly close above for confirmation.

And just when you thought inflation may have peaked...it pulls you back in. The ONS is out with a chunky revision to its PPI inflation reading for October – headline output producer prices rose 17.2% from the initial estimate of 14.8% due to an error. The peak in July was revised up to 19.7%. The annual input PPI was also revised up to 19.5% from 19.2% previously. All of which leaves the Bank of England’s relative dovishness all the more puzzling...the problem is the housing market that it daren’t crash.

But the pound and euro this morning are continuing their recent sideways move against USD, with the EUR nudging along near five-month highs, and sterling and the New Zealand dollar among those at fresh three-month highs, with the Aussie bumping up against its own two-month high.

EURGBP is up 0.1% this morning at 0.8605, revived from a near one-month low after some weak but slightly more optimistic data releases from Europe that built on other encouraging numbers of late.

This morning has seen a weaker German confidence survey, but stronger French and Italian number, which follows Germany’s Ifo business climate and expectations indicators surprising on the upside for the second consecutive month and coming on the heels of the better-than-expected numbers from the flash PMIs.

Minutes from latest ECB meeting showed “a few members expressed a preference for increasing the key ECB interest rates by 50 basis points” at the last meeting, but ultimately a 75bps increase was judged to be “an appropriate response in view of the protracted period of excessively high inflation and the risk that this might add to medium-term price pressures”.

Some economists expect the ECB to slow the pace of hikes to 50bps in December, following the 75bps pace in September and October, but it’s seen as a close call.

In forex markets, the stand-out events over the past 24 hours were the large 75-basis-point rate hikes in Sweden and South Africa, plus the 150bp rate cut in Turkey in preparation for elections next year.

This morning EURZAR and USDZAR are among the top rises, with the rand giving back some gains, with EUR also climbing against both Down Under dollars.

The pound has been solid in recent days amid some hawkish rhetoric in recent days from Bank of England deputy governor backing more rate rises and not dissimilar from the BoE chief economist, suggesting more rate rises are coming despite the fiscally tight budget and broadening consensus of recession.

This was the prediction from ING's Turner: "We think positioning has played a major role in this sterling recovery and GBP/USD could see some further, temporary gains to the 1.22/23 area – which we would again see as the best levels before year-end.

"Equally, EUR/GBP has good support in the 0.8550/8600 area, and given our view of a difficult risk environment into year-end and early 2023 as central banks raise rates into recessions, sterling should remain vulnerable."

There’s not much data to watch the rest of Friday, with many looking ahead to next week when a new month starts, bringing a new round of data.

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