The Dollar Dance
On Monday, the dollar index dipped below the 105 mark, pulling back slightly from its six-month peak. This movement was driven by a sense of caution among investors who were eagerly awaiting crucial US inflation data while processing recent macroeconomic information. Analysts are anticipating an annual inflation rate increase to 3.6%, primarily attributed to mounting energy costs.
Last week, data surprised the market by revealing a significant drop in new unemployment claims in the US, reaching their lowest point in over six months during the final week of August. This data contradicted earlier indications of a weakening labor market and defied market expectations of a modest increase in unemployment claims. Furthermore, the ISM Services PMI in the US unexpectedly surged to a six-month high in August, demonstrating the economy's resilience despite elevated borrowing costs.
Currently, the financial markets are assigning a nearly 50% probability of a rate hike in November, following an anticipated pause in September. Notably, the most substantial surge in buying activity was witnessed in the Japanese yen, which appreciated by over 1%. This uptick was triggered by remarks from Bank of Japan Governor Ueda, who raised the possibility of interest rate hikes in the near future.
The Euro's Steady Tango
The euro is currently holding steady around the $1.07 mark, maintaining its proximity to the three-month low of $1.0685 reached on September 7th. This stability is occurring in anticipation of the highly awaited European Central Bank (ECB) meeting scheduled for Thursday.
At this juncture, investors are evaluating the likelihood of the ECB's policy decision. There's a 62% probability that the ECB will maintain the interest rates at their current level of 4.25%, while a 38% chance exists for a 25 basis point rate hike. This deliberation stems from the Eurozone's persistent strong inflationary pressures, despite some signs of economic weakening in the region.
On Monday, the European Commission revised its growth projections for the Euro Area, forecasting a growth rate of 0.8% for 2023, which is a downward revision from the 1.1% estimate made in May. Furthermore, they anticipate a growth rate of 1.3% for the following year, down from the previous projection of 1.6%.
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