DailyFX Update(11/08/2023): A Strong Bullish Dollar, But How Long Will this Be Sustained?

Dollar Index Achieves Highest Point in Five Weeks

The US dollar staged a recovery, surpassing the 102.8 mark and attaining its highest price in a span of five weeks. This resurgence was prompted by a notable increase in producer prices that countered the growing sentiment that the Federal Reserve might not pursue further rate hikes. 

Earlier data revealed that the annual inflation rate in the US escalated to 3.2% in the previous month, up from 3% in June. This result fell slightly short of the anticipated 3.3%. Similarly, core inflation experienced a marginal decline, settling at 4.7% as opposed to the expected 4.8%.

Mary Daly, from the San Francisco Fed Bank, commented that the latest Consumer Price Index (CPI) figures don't necessarily signify a definitive victory over inflation for the central bank. She further noted that the labor market has yet to achieve equilibrium.

The DXY index remains on a trajectory for its fourth consecutive week of gains, bolstered by robust overall economic indicators from the US. Simultaneously, renewed concerns about the health of the US banking sector and a sluggish economic recovery on the mainland have contributed to this momentum.

In parallel, geopolitical anxieties have resurfaced due to Washington's decision to prohibit specific US technology investments in China.

British Pound Bounces Back Following GDP Expansion

The British pound made a slight advancement beyond the $1.27 level, recovering from the recent low of $1.267 reached on August 10th. This rebound followed a positive growth surprise in the UK economy, which has bolstered expectations of further tightening measures by the Bank of England.

The second-quarter UK GDP exhibited growth of 0.2%, surpassing both market forecasts of stagnation and the BoE's initial projection of 0.1%. This robust performance supports the central bank's stance that the British economy is likely to avoid slipping into a recession. 

Additionally, this data has reinforced market predictions of a 25 basis points rate hike from the BoE in the upcoming month. Another rate hike is also anticipated before the first quarter of 2024, marking the conclusion of the tightening cycle, driven by the persistent inflation rate that exceeds that of other European nations.

Across the Atlantic, signs of disinflation have led to the dollar index maintaining a relatively stable position without significant fluctuations.

Euro Softens Following US Price Data Release

The Euro exhibited a slight decline, slipping beneath the $1.1 threshold in response to the recent US inflation figures. These figures have heightened expectations that the Federal Reserve will be compelled to maintain elevated interest rates for a more extended period. The surge in producer prices, attributed to a rebound in services expenses, outpaced market predictions. Concurrently, the headline and core consumer inflation decelerated more than anticipated but remained notably above the Fed's desired target.

As of now, the likelihood of a 25 basis points rate hike by the Fed in November stands at approximately 32%. In contrast, market sentiment in Europe is divided concerning the possibility of another interest rate increase by the ECB. Recent data indicates that core inflation in the Euro Area did not exhibit the projected slowdown in July. However, economic indicators, particularly for Germany, have been signaling a subdued economic outlook.

Simultaneously, during its July meeting, the ECB altered its guidance, indicating a departure from the expectation of continually rising borrowing costs. President Lagarde mentioned that the outcome in September could either be a pause in the rate changes or a potential hike.

Loonie Touches Lowest Point in 2 Months

The Canadian dollar exhibited a decline, crossing below the 1.34 per USD mark, reaching its lowest point in over two months. This downward movement followed the release of data indicating the country's most significant trade deficit since November 2020. This data shed light on the magnitude of net currency outflows from the domestic economy, exerting pressure on the loonie.

Concurrently, recent labor statistics indicated that Canada's unemployment rate inched up to a peak not seen in a year and a half, reaching 5.5%. This rise occurred alongside a substantial 5% increase in wages, leading to a balanced labor market dynamic. This development introduces a spectrum of possibilities for the Bank of Canada (BoC) as it evaluates the necessity for a potential rate hike in September.

In terms of pricing data, the situation was somewhat contradictory. The inflation rate noticeably decelerated, registering 2.8%. However, the closely monitored trimmed-mean core inflation rate surpassed expectations, rising to 3.7%.

Yen Maintains a Position around 145 Mark

The Japanese yen maintained its position in proximity to the significant psychological level of 145 on Friday, inching closer to its lowest point since June 30th. This movement occurred within a context of limited trading activity due to Japan observing a holiday. Earlier this week, economic data revealed that producer prices in Japan experienced their smallest increase in over two years, marking the seventh consecutive month of deceleration in July.

In its July meeting, the Bank of Japan (BoJ) opted to retain its short-term interest rate target at -0.1%. However, there was a relaxation in its yield curve control. Governor Kazuo Ueda emphasized that this adjustment in policy is not indicative of a shift toward policy normalization.

Kiwi Dollar Indicates Significant Weekly Decline

The New Zealand dollar faced a 0.2% decline, reaching its lowest point since mid-November 2022 at $0.6008 on Friday. This marks the fourth consecutive session of weakening and puts the currency on track for a weekly drop of over 1%. The market atmosphere is characterized by cautiousness as traders brace for the upcoming RBNZ monetary policy meeting.

Anticipations revolve around the central bank's decision to maintain cash rates at 5.5%. This stance comes in response to signs of alleviating cost pressures, despite having executed a series of rate hikes totaling 525 basis points since late 2021. New Zealand's Q2 headline inflation settled at 6%, displaying a deceleration for the second consecutive quarter. Concurrently, food inflation eased to a 10-month low in July.

Separate data revealed a significant contraction in the country's manufacturing sector last month, with output experiencing a notable tumble – marking the most substantial contraction since August 2021.

On another front, the US dollar demonstrated stability, with the dollar index hovering around 102.5. This follows a meticulous assessment by traders of the marginal increase in US inflation data for July. This evaluation aligns with a statement from San Francisco Fed Bank's Mary Daly, indicating that the battle against persistent inflation in the US is far from concluded.