USD Resumes Last Week’s Decline, With FED Unable to Convince Markets on More Hikes

Last week the USD turned quite bearish, as both consumer inflation CPI and producer inflation CPI showed a sizeable decline in October, which has the market convinced that the FED is down with rate hikes. Today the decline resumed again as the new week started, with USD/JPY being the biggest drag. Before plunging all the way to 148.10 in European morning trade, the pair recovered from 148.70 in Asia to 149.00. This is looking even worse as the Treasury yields remain stable. In fact, yields are a touch higher today while and the general risk appetite remaining more cautious.

If the yields start declining, the dollar could turn even more bearish. However, let’s wait and watch how US trade develops. The GBP and Euro are also displaying buying momentum, with GBP/USD rising by 0.3% and climbing above 1.25, while EUR/USD by just 0.2% to 1.0942.

Commodity currencies and crude Oil are also profiting, and the stronger Chinese yuan has been the main drivers today. Maintaining the solid front from earlier in the day, AUD/USD was up 0.7% to 0.6560 and NZD/USD is up 0.6% to 0.6022 but they too have pulled back down domewhat, which is presenting us with buying opportunities.

In any case, the dollar is still weak, so the key going forward will be to keep an eye out for any additional market changes. And this seems to be the case going forward for the time being. There hasn’t been any economic data releases, apart from some hawkish comments by ECB members, which are helping the Euro as well.

Remarks by ECB Policymaker, Pierre Wunsch

• Bets on rate cuts risk prompting rate hikes instead
• Markets are optimistic to rule out further rate hikes
• But rates should stay unchanged in December and January

Until you read the last comment, which states that he sees rates remaining steady in December and January, the headline comment seems like a warning. As Wunsch is now extending the deadline for changes from December to January, policymakers have already ruled out any changes in December. This is consistent with the market’s belief that the ECB is finished.

EUR/USD Live Chart