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Stronger-than-expected US retail sales and a dovish ECB rate cut are driving the dollar’s surge, which goes in tandem between the 2 largest central banks in the world.
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Two key events in the US are crucial to the dollar strength, namely the FOMC and the Presidential election in November.
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With strong labour data and a resilient economic condition, the Fed may not cut the rate in November. The best case is only 25 bps. We favor a no-cut at the moment.
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Meanwhile, lackluster economic growth and decreasing inflationary pressure in the Eurozone may spark continuous rate cuts by the ECB going forward, which may continue to weaken the Euro against the dollar in the short-term.
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All eyes will be on the CPI data release in Japan, we expect a modest increase in inflation but the Bank of Japan will closely monitor not only the CPI data, but will also monitor and second guess the Fed’s interest rate decision. 150.00 against the dollar may push the BOJ to hike as is approaching the ‘danger’ level.
Dollar strength to continue on strong retail sales and strong economic prospect
Despite economic concerns and job market uncertainties, consumer spending remains strong, with higher-income households offsetting financial pressures on others. In September, retail sales rose 0.4% MoM, exceeding expectations, while the “control group” surged 0.7%, indicating robust consumer trends. Adjusted for inflation, real spending grew 0.5% MoM, outpacing softer consumer confidence surveys.
Hurricane-related stockpiling boosted “miscellaneous” store sales by 4% MoM. Additional growth was seen in clothing (+1.5%), health and personal care (+1.1%), and food services (+1%). Meanwhile, electronics (-3.3%) and furniture (-1.4%) declined, and falling fuel prices reduced gasoline station sales by 1.6%. Overall, the data underscores the resilience of the household sector despite ongoing uncertainties. We also expect upcoming inflation pressure to rise with the ongoing geopolitical risk in the Middle east which may spike the crude oil prices and the Hurricane effect, which may drive up prices.
ECB to continue their rate cut cycle
The European Central Bank (ECB) lowered the interest rate by 25bp to 3.25% as expected, but the accompanying communication was more dovish than anticipated. President Christine Lagarde highlighted that the decision was unanimous, signaling no opposition from previously hawkish members. Although growth concerns were downplayed, this did not prompt markets to adopt a more hawkish stance. The possibility of a Trump victory, which remains high, could prompt a more aggressive 50bp rate cut.
Markets are now assigning a higher probability to a 50bp cut in December, driven by Europe’s deteriorating economic conditions and declining inflation.
With traders increasingly expecting deeper cuts, the short end of the EUR yield curve may continue to steepen. Until there is greater clarity on the outcome of the Harris vs. Trump election, easing driven by growth concerns is likely to remain the dominant theme. While the ECB’s policy rate target seems steady for now, the focus has shifted toward the speed of rate cuts rather than their total number. Meanwhile, the longer end of the yield curve will likely remain influenced by global factors, including the impact of U.S. Treasury curve steepening following stronger-than-expected U.S. economic data.
The Yen continued to weaken to our expected target price of 150.35 and is likely to see the short-term correction in anticipation of the CPI data release this Friday. It will be volatile and likely to mean-revert to 145.00 level before rebounding.
Meanwhile, the dollar has reached beyond 103.00 psychological level based on our last report dated 7 Oct 24 and the dollar may likely consolidate in the near-term between 102.40-103.80. Should the FOMC maintain its interest rate policy without a cut, then we may see the dollar weaken past 103.40 and target the lower end at 101.30.
Though the EUR/USD managed to rebound at 1.0986 support, the failure to break past the high of 1.1200 psychological resistance and further rate cut has caused the EUR/USD to complete its double top bearish reversal and head straight to 1.0800. From here, we believe that the EUR/USD may see a slight rebound testing the 1.0980 level. Currently, the pair is in a bearish downtrend.
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