Foreign Exchange Commentary

Summary

• The U.S. Dollar Index (DXY) is trading near 99.81 as softer U.S. data intensifies rate cut expectations
• There is an 80% chance of a 25bp rate cut at the December Federal Open Markets Committee Meeting
• Headline Producer Price Index (PPI) for September matched forecasts, raising 0.3% MoM
• U.S. Retail Sales data indicates consumers are pulling back spending as the labor market weakens
• Wednesday will see the release of the U.K. budget from Chancellor Rachel Reeves
• Thursday, U.S. markets will be closed in honor of Thanksgiving
• Markets are monitoring Russia-Ukraine peace talks as the groups hold discussions in Abu Dhabi

Big Picture: U.S. Economic Sentiment Decline
U.S. economic sentiment appears on the decline after weak ADP private payrolls data indicated employers were shedding an average of 13,500 jobs per week for the 4 weeks, ending November 8^th; furthering interest rate cut expectations. The US Dollar Index (DXY), which compares the U.S. dollar against a basket of G10 currencies, opened the Thanksgiving holiday-shortened week near 100.2, but has dipped to levels near 99.78 into the Tuesday session after G10 currencies gained against it.

Additionally, weak U.S retail sales data showed consumer pullback in spending with only 0.2% growth despite surveys indicating a 0.4% advance. Despite some intraday attempts to claim further ground, the DXY is below the 200-day moving average at the time of this writing, with resistance at 100.39 and support at 99.50.

The U.S. dollar (USD) is down nearly 10% year-to-date as US economic data continues to deliver conflicting signals amid changing Federal Reserve rate expectations. The Fed’s most recent 25bp rate cut and cautious messaging on future moves on top of a historic 43-day government shutdown has left the USD directionality uncertain.​

While most economists agree that the labor market is softening, the pushback on rate cuts is largely due the inflation story - which does not appear to be resolving anytime soon. Producer Price Index (PPI) headline demand indicated that prices rose for producers 0.3.% for September and Consumer Price Inflation (CPI), the inflation gauge is at 3%, a full point above the fed’s target rate of 2%.

Currently, however, Fedspeak appears to have shifted dovish. In remarks Tuesday, San Francisco Federal Reserve President Mary Daly indicated she saw a deteriorating labor market and supported rate cuts - a claim echoed by Governor Christopher Waller and New York Fed President John Williams. Current interest rate cut expectations are priced in at about 80%; a major increase from last week’s sentiment which was closer to 40%.

Across the pond, in England, the pound-sterling has caught a bid, mostly on U.S. sentiment decline, but is still down 3.3% from its September highs against the U.S. dollar. After a controversial budget bill, which intended to raise social security contribution taxes on most British citizens was repealed after staunch pushback, U.K. Chancellor Rachel Reeves will get another shot to appease the country with a new budget coming out Wednesday.

The United Kingdom has been struggling since Brexit; battling high inflation, limited growth, and a growing debt crisis as U.K. gilts, especially on the long end of the curve continue to sell off.

Across the channel, however, the euro currency is advancing. This move was supported by better-than-expected Euro-zone services PMI, which hit an 18-month high at 52.8 and weakened U.S sentiment. The pair remains broadly range-bound between 1.15-1.17 as USD volatility drives price action- but strengthening European economic sentiment may cause an eventual breakout. For now, European Central Bank expectations are to keep interest rates unchanged, and the economy is expanding.

On the USD/JPY front, the Japanese yen has retreated off its lows of 157 last week but continues to struggle - pressured by fiscal uncertainty and subdued rate hike prospects from the Bank of Japan. With the pair parked near levels that could attract intervention risk, Japanese yen sentiment remains vulnerable as traders examine the potential impacts of Japanese Prime Minister Sanae Takaichi’s $135 billion dollar stimulus packages which is projected to increase the struggling economies GDP by 1.4% per the cabinet office.