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FX Daily 26.10.23: ECB Guidance, US Growth and Yen Intervention Threat Key Risks Today

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Global markets will have a key set of fundamentals across all major regions to deal with on Thursday with dollar strength tending to be the dominant factor as the currency index hit a 20-day high.

Fundamentals are liable to back the US currency, but there will be concerns that substantial amount of favourable developments have been priced in and volatility is liable to increase.

The dollar has posted strong gains over the past 24 hours with the Dollar to Yen (USD/JPY) exchange rate breaking above the 150.0 level and hitting 12-month highs above 150.70 before a retreat to 150.35.

The USD/JPY break above 150 has increased protests by Japanese financial officials with Finance Minister Suzuki warning that forex moves are being watched closely with a high sense of urgency.

Unless there is intervention by the Bank of Japan, markets will attempt to push the dollar even stronger.

Intervention would trigger a sharp dollar correction and there will be nervousness holding USD/JPY positions above 150.00 , but with the potential for strong buying on dips.

Nicholas Chia, macro strategist at Standard Chartered commented; "Given the cap on Japanese yields, something had to give in the context of enduring dollar strength on the back of U.S. macroeconomic resilience."

He added; "Any judgment on the yen also needs to account for the central bank's reaction function. In other words, there is the risk of an earlier-than-envisaged policy shift by the BOJ, given its track record of surprising markets."

The Bank of Japan will announce its latest policy decision on October 31st.

As far as the US economy is concerned, the US will release the latest GDP data with the advance reading for the third quarter of 2023. Consensus forecasts are for an annualised growth rate of 4.5% from 2.1% previously.

Strong data would reinforce the narrative of a strong US economy and maintain expectations that the US will out-perform the Euro-Zone area.

The latest data on jobless claims and durable goods orders will be released at the same time. Markets expect an increase in claims to 208,000 from 198,000 last week.

Reaction in the bond markets will inevitably be a key element during the New York session.

The Federal Reserve will remain in its blackout period ahead of next week’s policy decision.

US yields moved higher again during Wednesday which also underpinned the US currency.

Overall risk conditions were also defensive with further losses in equity markets as the Nasdaq index came under pressure.

Middle East tensions will remain a key element with the potential for defensive dollar demand.

There were reports on Wednesday that an Israeli ground offensive into Gaza would be delayed to allow the US more time to bring more air-defence systems into the region.

Israel Prime Minister Netanyahu insisted that the ground offensive would be launched soon, but gave no timetable while there were reports overnight of small-scale incursions into Gaza.

The ECB will announce its latest policy decision with strong expectations that the main refi rate will be held at 4.50%.

Bank President Lagarde will also hold a press conference following the policy decision.

Forward guidance from the bank will inevitably be an important element for currency markets and the Euro.

The Euro gained some support from a stronger than expected German business confidence reading with the IFO index strengthening to 86.9 for October from a revised 85.8 previously and above expectations of 85.9.

The Euro to Dollar (EUR/USD) exchange rate retreated to lows near 1.0565, but was again broadly resilient during the day.

Wider dollar strength pushed EUR/USD to 1-week lows below the 1.0550 level in early Europe on Thursday.

Commonwealth Bank of Australia strategist Carol Kong commented; "With the European economy soft and inflation easing, we expect attention will soon turn to the likely timing of rate cuts. At this stage we have the first cut pencilled in for June 2024.”

She added; “Soft European economic data and negative interest rate differentials between Europe and the U.S. will likely keep a lid on euro/dollar."

EUR/USD will find it difficult to avoid a test of 1.0500.

The Pound was unable to make headway during Wednesday with further unease over the domestic economic outlook and expectations that further Bank of England rate hikes are off the table.

Overall risk appetite also remained weak which hampered the Pound, especially with a lack of confidence in the global economy.

The Pound to Dollar (GBP/USD) exchange rate posted steady losses to near 1.2100 and dipped further to 3-week lows near 1.2070 on Thursday.

There is an increased risk that GBP/USD will slide to test the 1.2000 level.

The Bank of Canada held interest rates at 5.00% following the latest council meeting which was in line with consensus forecasts.

The central bank noted that the economy was responding to tighter credit conditions with supply and demand now moving into balance.

It was still concerned over stubborn inflation and stated that interest rates could still be increased again if necessary.

The Pound to Canadian dollar (GBP/CAD) exchange rate spiked to highs above 1.6750 immediately after the decision before a retreat to around 1.6685 on Thursday.

Reserve Bank of Australia (RBA) Governor Bullock stated that the central bank is still considering whether the latest inflation data represented a material increase.

Many investment banks expect the RBA will increase rates in November, but Bullock’s tone undermined confidence.

Vulnerable risk conditions also undermined the Australian dollar and the Pound to Australian dollar (GBP/AUD) exchange rate recovered to 1.9265 before a retreat to 1.9185.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also advanced to highs at 2.0925 before a retreat to 2.0860.

The dollar to yen (GBP/JPY) exchange rate traded around 181.80 with volatility set to increase.

The Pound to Swiss franc (GBP/SEK) exchange rate edged lower to near 1.0850.

The Pound to Norwegian krone (GBP/NOK) exchange rate strengthened to 3-month highs just above 13.60 before stabilising.

The immediate US political stalemate ended with Johnson voted in as speaker.

This should also prevent a government shutdown in the middle of November and there should also be a release of funds for Israel and Ukraine with the congressional rhetoric feeding into geo-political tensions.