The US dollar has been on an uptrend in October, driven by higher interest rates and a stronger economy than other major ones. Data showed that employment costs rose more than expected in Q3, indicating a tight labor market. The Federal Open Market Committee (FOMC) meeting is expected to keep interest rates unchanged, but traders will be closely watching for clues about the Fed’s future plans.
US Economic Growth Q3 2023
The US economy demonstrated an accelerated rate of growth of nearly 5% during the third quarter of 2023, exceeding previous expectations. The country’s gross domestic product (GDP) expanded at the fastest pace in almost two years. This growth is attributed to strong consumer spending and increased investment activity. These positive developments challenge earlier predictions of a potential recession and may contribute to a prolonged period of higher interest rates.
The strong economic performance in the US could have ripple effects globally. The accelerated growth may provide a boost to other economies around the world and potentially lead to increased global trade. However, uncertainties remain, particularly in relation to potential inflationary pressures and the Federal Reserve’s approach to monetary policy.
EUR/USD
The euro extended gains to $1.065 as traders digested fresh economic data for the Eurozone. Inflation in the Euro Area fell more than expected to 2.9% in October. Still, the economy unexpectedly contracted 0.1% in Q3, worse than forecasts of a flat reading, signaling the European Central Bank’s (ECB) tightening campaign that lifted borrowing costs to record levels in weighing on the economy.
Last week, the ECB left interest rates unchanged for the first time in more than a year, in line with market expectations, but reiterated that borrowing costs would be left at a restrictive level for some time. The common currency is set to end the October month about 0.8% higher and above December 2022 lows of $1.046 touched on October 3rd.
The economic data paints a mixed picture for the Eurozone. While inflation fell more than expected, indicating progress in controlling price pressures, the contraction in economic growth raises concerns. This contraction has been attributed to the ECB’s tightening campaign, which has led to elevated borrowing costs that have negatively impacted the economy. The ECB’s decision to hold interest rates steady is seen as a continuation of its strategy to maintain restrictive borrowing conditions for the foreseeable future. As traders digest this data, it’s anticipated that the EUR/USD will face continued volatility in the coming month.
USD/JPY
The Japanese yen has strengthened as speculation grows regarding a potential policy adjustment by the Bank of Japan (BOJ). The yen’s rise came as the US dollar weakened. Market participants are closely watching for any signs of changes in the BOJ’s monetary policy, which could lead to a less accommodative stance.
The US dollar’s decline was partly driven by uncertainties surrounding the Federal Reserve’s tapering timeline, alongside its dovish stance. The yen, affected by these movements, experienced a consolidation against the US dollar after hitting a high earlier in the month.
Looking ahead, the performance of the USD/JPY will largely depend on the BOJ’s policy decisions and broader market sentiment towards the US dollar. Any indications about potential policy tweaks by the BOJ, whether towards a more hawkish or dovish approach, could significantly impact the USD/JPY pair.
Additionally, developments surrounding the Federal Reserve’s monetary policy and overall market risk sentiment will heavily influence the future direction of the currency pair.
NZD/USD
Consumer inflation in New Zealand has slowed, although it still exceeds the target set by the country’s central bank. The data released by Statistics New Zealand indicates that consumer prices rose by 5.6% year-over-year in the third quarter, which is slightly lower than the 6% increase seen in the previous quarter.
Despite this deceleration, the rate remains slightly below the Reserve Bank of New Zealand’s (RBNZ) target range of 6%. The moderation in inflation can be attributed to lower housing and transport costs, offsetting increases in food and beverage prices.
The report highlights that the RBNZ may potentially be pressured to raise interest rates in the future to curb rising inflation. However, the central bank has indicated that it will maintain its current stance by keeping the official cash rate unchanged until early next year.
The RBNZ aims to achieve sustainable employment and maintain inflation within the target range. The central bank will closely monitor the inflation situation and adjust its monetary policy accordingly.
Looking ahead, future inflation trends in New Zealand will heavily depend on various factors such as supply chain disruptions, global commodity prices, and the pace of the economic recovery.
XAU/USD
Gold prices held steady near the $2,000 per ounce mark last week, driven by caution ahead of the Federal Reserve’s upcoming decision on interest rates and geopolitical tensions in the Middle East.
In October, Israeli forces launched their largest ground attack on Gaza despite diplomatic efforts to avoid a full-scale invasion. Gold prices were held relatively steady, although evidence of US economic resilience and higher interest rates created upward pressure. This was supported by the US economy expanding at its fastest rate in nearly two years, while the European Central Bank maintained its key rate despite weak PMI readings.
The US Federal Reserve and Bank of England are expected to leave rates unchanged, while the Bank of Japan adjusted its yield curve control policy. Geopolitical tensions in the Middle East continue to drive up demand for gold, pushing it towards an 8% monthly gain. In addition, President Biden urged Israel to prioritize civilian protection and increase humanitarian aid in response to an intensified assault on Gaza.
Conclusion
The performance of major currency pairs this month was impacted mainly by monetary policy decisions and geopolitical risks. The US dollar’s decline was partly driven by uncertainties surrounding the Federal Reserve’s tapering timeline, alongside its dovish stance.
For the two-day meeting, traders give the FOMC a 97% chance of keeping interest rates steady. The Fed’s objectives over the next few months will be the subject of much speculation.