Weekly Forex Review & Outlook 05-Dec-2022
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Weekly Forex Review & Outlook 05-Dec-2022: Has the dollar sell-off gone to far?
The Reserve Bank of Australia is expected to hike by 25 basis points to take the cash rate to 3.1%.
A review of last week
Softening of the US dollar continued over the past week, with sterling, euro, yen, Kiwi, Swiss franc and other currencies enjoying highs not seen for several months.
The dollar index (DXY) today reached a five-month low and around 8% off its early November high, just above 104.1 in the early hours, though it has picked up to 104.5.
Last Friday’s non-farm chunky payrolls report is still possibly being digested, with a big jump in the headline jump number and a strong rise in average hourly earnings – the biggest in 10 months.
Currency traders and other market participants are all mulling whether good economic news is really bad news inasmuch as it means inflation is proving stickier and implying Federal Reserve interest rate hikes will keep going longer.
Over the week, GBP/USD started at 1.206, dropped to 1.195 on Wednesday before rocketing up on Thursday after US Fed chief Jerome Powell said it “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” and after Friday’s jobs data, the pound skimmed close to six-month highs at 1.234 last night.
The has been on an even smoother rise, excepting occasional dips, and this morning EUR/USD reached 1.058 for the first time since late June.
GBP/EUR has also been heading higher, spiking on Thursday to just below 1.17 but unable to breach that level that has remained a ceiling since the last day of August.
GBP/USD has now recovered nearly 20% since its Liz Truss/Kwasi Kwarteng tumble, while the euro has gained more than 10% since the end of September.
It is notable that many commentators are concerned that the dollar sell-off has gone quite far considering the Fed is still fairly hawkish.
Notable also, is China and the yuan, with Beijing relaxing some of its covid testing restrictions after two years of strict lockdowns, and USD/CNY today trading below 7.00 for the first time since September.
Also to note in the past week, the New Zealand dollar has risen against not just USD but also made good gains the Canadian dollar (CAD) and Swiss franc (CHF).
Week ahead
Ahead of a Fed policy decision next week, we enter a blackout period in terms of speakers, though there will still be data aplenty – though the big one (CPI inflation) is also next week.
That might allow attention to shift to the Australian and Canadian dollars, with central bank decisions on Tuesday and Wednesday respectively, with the Reserve Bank of India also on meeting on the latter.
The Reserve Bank of Australia is expected to hike by 25 basis points to take the cash rate to 3.1%.
The Canadians’ last meeting showed a dovish tilt, which spurred a pivot trade on the USD, while guesses for this week are split between a quarter or half of a percent hike.
This week the US data starts with ISM services index today and ends with producer prices and the University of Michigan consumer confidence number on Friday with the latest inflation expectations numbers included.
In between there’s the October trade balance on Tuesday, consumer credit on Wednesday and initial jobless claims on Thursday.
Elsewhere, the European Central Bank president Christine Lagarde speaks today and Thursday, while eurozone data includes jobs and GDP on Wednesday.
For GBP, PMI services data today will be followed by construction PMI and retail sales tomorrow, house prices on Wednesday and Thursday, with perhaps the important number being consumer inflation expectations on Friday.
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