- United States inflation-related figures were higher than anticipated in August.
- The European Central Bank delivered a dovish hike, fueling risk of a recession.
- EUR/USD fell to its lowest since March and has room to extend the slump.
The EUR/USD pair ends an intense week trading near a weekly bottom of 1.0632, its lowest since last March. The Euro advanced throughout the first half week amid a better mood spurred by Asian news.
On the one hand, Bank of Japan (BoJ) Governor Kazuo Ueda hinted at a shift in the ultra-loose monetary policy. “The BoJ could have enough data by year-end to determine whether it can end negative rates,” Ueda noted, adding they will focus now on a “quiet exit.” On the other, China’s inflation picked up modestly in August, following a negative reading in July. Chinese Consumer Price Index (CPI) rose 0.3% MoM and 0.1% YoY. At the same time, mortgage demand and corporate loans surged, suggesting the country could be turning the corner. The news put pressure on the US Dollar, with financial markets optimistic but cautious ahead of first-tier events.
Hotter US inflation
Things changed on Wednesday when the United States (US) released the August CPI, as inflation was slightly higher than anticipated. The annual inflation rate ticked higher from 3.6% in July to 3.7%. In the month, inflation was 0.6%, as expected, while the core annual figure also matched expectations at 4.3%. The numbers boosted the USD despite being hotter than previous numbers, as market players considered they were not enough to twist the Federal Reserve’s (Fed) dovish path.
On Thursday, the US published the Producer Price Index (PPI), which increased by 0.7% MoM and 1.6% YoY from 0.4% and 0.8%, respectively, alongside Retail Sales, up 0.6% in August and much better than anticipated. Once again, the data confirmed the American economy remains resilient, while price pressures did not vary enough to become worrisome.
Dovish hike from the ECB
On Thursday, the European Central Bank (ECB) decided to go forward with hikes and lifted rates by 25 basis points (bps), taking the Deposit Facility Rate to a record 4.0%. The announcement was, however, seen as dovish, as President Christine Lagarde and co hinted at a potential peak.
“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target,” the accompanying statement read. Additionally, Lagarde said that the focus will probably move to the duration of higher rates rather than to the level of rates themselves.
The news hit hard the Euro, as the Euro Zone already suffers from stagnation, that is, little to no economic growth. Coupled with stubbornly high inflation, the future looks gloomy, particularly for the less powerful south, including countries such as Portugal, Spain and Italy.
Italian Deputy Prime Minister and League Leader Matteo Salvini accused President Lagarde of living “on Mars,” blaming the ECB for caring about the economic difficulties of families and businesses.
Sentiment upbeat at the end of the week
Speculative interest recovered its optimism by the end of the week, despite Fitch Ratings cutting Chinese growth forecast to 4.8% for 2023 while lifting global economic growth. The better mood could partially be explained by upbeat data, as China published August Industrial Production and Retail Sales, up 4.5% and 4.6% respectively, and much better than anticipated.
Meanwhile, US data also resulted better than expected. August Capacity Utilization increased to 79.7% from 79.5% in July, while Industrial Production rose 0.4% vs expectations of a 0.1% advance. On a down note, the preliminary estimate of the Michigan Consumer Sentiment Index printed at 67.7 in September, down from 69.5 in August.
Federal Reserve decision takes centre stage
Financial markets gear up for the US Fed monetary policy announcement next Wednesday. The central bank is widely anticipated to remain on hold. According to the CME WatchTool, the odds for a no-change stand at 97% ahead of the event. At the same time, the chance for a 25 bps hike in November currently stands at 34.4%. Investors believe there is a chance for a final hike before year-end.
As said, the central bank is not expected to act. Still, words from Chair Jerome Powell will be closely watched in search of clues on future decisions. Furthermore, the Fed will publish fresh economic projections and the so-called dot plot, which could give a picture of when policymakers may consider cutting rates.
Beyond the US central bank’s decision, the macroeconomic calendar will include the preliminary estimates of the September S&P Global PMIs for Europe and the US. The indexes measure business activity and indicate whether the economy is expanding or contracting.