Hawkish comments from Fed officials, along with uncertainty over China's Covid policy, led to sell-offs in US stocks and profit-taking on Monday. New York Fed chief John Williams said there seems to be a higher rate trajectory than in September, while St. Louis Fed President James Bullard said markets are underestimating the chance that the central bank will be more aggressive instead of softer. Accordingly, expectations for lower rate hikes have dwindled, which could prompt a rise in dollar, ending its current decline.
EUR/USD
Euro has been going up despite having no solid reason. Real consumer spending is on a steady decline due to high inflation, while manufacturing costs are rising amid decreasing demand. There is also little chance that Europe will escape recession as programs implemented by governments addressing the energy crisis have not reached the ceiling. The debt-to-GDP ratio, which was declining in the first half of 2022, is also starting to rise, while the latest data indicates that inflation is unlikely to return to normal levels before 2024.
Most likely, the reasons for euro's rise are the stocking up of gas to storage facilities before winter and the expectation that the war in Ukraine will end. These are evident in the analyses made by most banks, such as DanskeBank, Mizuho, ScotiaBank and NAB.
If the two are not the reason, then there is really no grounds for euro to rise. After all, inflation in Europe is higher than in the US, not to mention production costs are higher, while consumer demand is weaker. The expected quantitative tightening by the ECB in early 2023 will also lead to lower investment, and the rate differential will remain in favor of dollar.
Recent data shows that the settlement price of euro is above the long-term average and is directed upwards.
Currently, euro is above the local high of 1.0367 and is heading towards 1.0600/20. It is quite difficult to say if a more pronounced rally will be seen as Europe is still subjected to problems with energy and inflation.
GBP/USD
Recession seems to have started in the UK as GDP growth in the 3rd quarter came out negative. PMI indices are lower, while mortgage rates are rising because of high inflation. Household income growth is also lagging behind price growth, which means lower consumer demand. The region is also subjected to a massive energy crisis like Europe, and the government is taking measures to close the budget deficit. The measures are amounting to a tightening of tax policy, which will hasten the coming of the recession.
In terms of rate forecasts, the Bank of England said it would peak at 4.6% by mid-2023. This is lower than the Fed's, meaning the yield differential will still be in favor of dollar.
Nevertheless, recent data shows that the settlement price of pound is above the long-term average and is directed upwards. There is a high chance that GBP/USD will rise.
For now, pound is heading towards the resistance level of 1.2290/2300. If it manages to consolidate higher, the next target will be 1.2570/2750, and the trend will shift from bearish to bullish. Expect a persistent struggle just below 1.23 and increased volatility.