The profits of dollar followed a jobs report USA which showed the biggest jump in six months in September, a drop in the unemployment rate and solid wage increases, all pointing to a resilient economy and forcing markets to reduce the prices of the rate cuts of the Federal Reserve.
Analysts said many of the factors that weighed on the dollar over the summer had reversed, citing easing concerns about a recession and price action that suggests the limits to pricing a currency function have been reached. moderate reaction with this data set.
“We do not see a factor that can rebuild the structural short positions in US dollars in the coming weeks,” said Francesco Pesole, currency strategist at ING. “Markets appear to have given up on another 50 basis point cut, and the inflation figures should not change that, and although the situation in Middle East may not worsen further, the consensus seems to be that a material de-escalation is not likely for now,” he added.
He dollar indexwhich measures the performance of major currencies, rose 0.05% to 102.60. It rose to a seven-week high of 102.69 on Friday, posting gains of more than 2% for the week, its biggest advance in two years. At the beginning of last week it was slightly above 100.
MUFG noted that this is the second time that the dollar index has pulled back towards the support of the 100.00 level in recent years. On the last occasion, in July 2023, the Dollar Index tested but failed to break below the 100.00 level before staging a strong rally (+7.8%) over the following three months.
“The scope of the fiscal stimulus in China, which would mainly help economies outside USA“, will be one of the main factors affecting the dollar in the short term, along with macroeconomic data, which may influence the path of the Fed’s policy,” said Lefteris Farmakis, currency strategist at Barclays. China is about to announce the details of his fiscal plan to boost the economy.
Eyes on the Middle East and European countries
In Middle East, Israel bombed targets Hezbollah in Lebanon and Gaza Strip on Sunday, on the eve of the one-year anniversary of the Oct. 7 attacks that sparked the war. The Israeli Defense Minister also declared that all options were open to retaliate against arch-enemy Iran.
“Effective tax measures in Italy and France would benefit the euro at the margin, as they would strengthen the sovereign solvency and, therefore, the credibility of the eurozone project,” argued Farmakis of Barclays. The two countries, subjected by the European Union to an excessive deficit procedure, are taking steps to reduce their budget deficits.
He yen fell slightly to 149.10 per dollar, its lowest level since August 16, before paring losses and trading around 148.60. This came on top of a more than 4% drop last week, its biggest weekly percentage drop since early 2009. The yen’s underperformance also has to do with comments last week from the new prime minister, Shigeru Ishiba, that They fueled expectations that rate hikes in Japan are further away.
For its part, the returns of the treasury bonds US 10-year bonds reached a new two-month high of 4.016% in London trading. However, Barclays estimates they have room to rise about 20 basis points even after taking into account the worst-case economic scenario, arguing that recent employment data strengthened its conviction that there will be a gradual and prolonged easing cycle by the Fed.
BofA now forecasts the Fed will cut 25 basis points per meeting through March 2025, and then 25 basis points per quarter through the end of 2025.
The markets expect the Federal Reserve cut rates by just 25 basis points in November, instead of 50 basis points, after jobs data. They now price in a 95% chance of a quarter-point cut, up from 47% a week ago, and a 5% chance of no cut at all, according to CME’s FedWatch tool.
Meanwhile, the pound sterling fell 0.4% against the dollar. Last week it recorded its biggest daily drop since April after comments by Bank of England governor, Andrew Baileywill trigger a substantial liquidation of net long positions in pounds, making the British currency more vulnerable to changes in sentiment.
Source: Ambito
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