US dollar strength supported by higher rates-for-longer amidst a resilient US economy
United States Currency Report -October (GDP update)
Derbyshire, UK – October 27th, 2023 - This is the currency report for the US Dollar and is intended to be a reference aid for your own analysis and trade planning. The next update will be after the FOMC meeting on Wednesday, November 1st.
Decisions to trade are made at your own monetary risk.
US dollar strength supported by higher rates-for-longer amidst a resilient US economy
The Federal Reserve is maintaining high interest rates to combat inflation, even though it may dampen economic growth. The economy is performing slightly better than expected, with an optimistic outlook for growth, an indifferent outlook for annual CPI, and unemployment. The Federal Funds Rate is tracking with the FOMC's forecast, and there's speculation of small cuts in 2024. The DXY's recent uptrend, starting in July 2023, is attributed to expectations of the Fed's extended high-rate policy due to the resilient U.S. economy. The U.S. economy is slowing but still growing, with high but decreasing inflation. Various economic indicators show mixed signals. Additionally, conflicts like the Israel-Hamas War, the Ukraine-Russia war, and the U.S.-China trade war contributes to global uncertainty and affect economic conditions and international relations.
Monetary Policy
SUMMARY: The US Federal Reserve is keeping interest rates high in an effort to bring down inflation, which could slow economic growth. The rate outlook is for rates to peak in 2023 and begin to be cut in 2024. This is likely to have a mixed impact on the US dollar.
On the one hand, a strong US economy and higher interest rates relative to other countries will attract foreign investment and support the value of the dollar. On the other hand, a strong dollar can make US exports more expensive and less competitive in global markets, which could weigh on economic growth.
Interest rates held but no cuts in sight
The seven members of the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) set monetary policy, including the Federal Funds rate (interest rate). The Federal Funds rate is the interest rate that banks pay to borrow money from other banks. This rate affects the interest that banks charge their borrowers.
The FOMC meets to set monetary policy eight times a year, the latest was September 20th and the next is on November 1st.
The interest rate of the US was held at the September meeting after being hiked by 0.25% in July and throughout most of the previous twelve meetings. This indicates that the Federal Reserve is hawkish but has become cautious as inflation has been falling quickly and they want to avoid affecting growth. Trading Economics forecast 5.50% to be the peak rate and 2024 to see cuts of 0.25%.
Key points of the Federal Reserve’s FOMC September 2023 meeting:
The economy is expanding at a solid pace, but job growth has slowed in recent months.
Inflation remains elevated.
The Fed is committed to returning inflation to its 2% objective.
The Fed decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent.
The Fed will continue to monitor incoming information and adjust the stance of monetary policy as appropriate.
The Fed is keeping interest rates high in an effort to bring down inflation and is aware that this could slow economic growth, but it believes that it is necessary to bring inflation under control.
Sources: The Federal Reserve, Trading Economics, FXStreet
The economy is performing slightly better than forecasted
The Federal Reserve’s Federal Open Market Committee (FOMC) makes economic forecasts four times a year. The most recent was at their September meeting and they will be updated in December.
Changes in Real GDP (annualised) has an optimistic outlook compared to the FOMC’s forecast and recession risks appear minimal.
Annual PCE has an indifferent outlook compared to the FOMC’s forecast and is on track to come in as expected.
Unemployment has an indifferent outlook compared to the FOMC’s forecast although it could climb a little higher than expected.
The Federal Funds Rate is on track to match the FOMCs’ forecast and is likely at the peak with small cuts beginning to be priced in for 2024.
Market Narratives
Resilient US Economy is applying bullish support to the USD
The DXY has gained and lost value in sympathy with the US inflation rate which peaked in late 2022. The current uptrend of the DXY formed in July 2023 when investors began to reposition for the likelihood that the Fed will keep rates higher-for-longer due to the US economy being more resilient than anticipated.
In the previous month, the DXY has advanced this uptrend as economic indicators support the "Resilient US Economy" narrative.
Upside moves have the potential to test the resistance area ≈$114.00 while downside retracements could fall to test the support level ≈$103.6.
Economic Indicators
SUMMARY: The US economy grew at a fast pace in Q3, but economists are forecasting a much weaker Q4. Inflation is slowing, but remains above the baseline trend. Retail sales are set to continue rising, but at a slower pace. Payrolls jumped higher in September, but are expected to fall back in Q4. Unemployment remained steady in September, but is expected to rise in Q4. Overall, the economic outlook is mixed, with some indicators suggesting growth is slowing and others suggesting it is remaining strong. This is likely to have a mixed impact on the US dollar, with some factors putting downward pressure on its value and others putting upward pressure.
Slowing economy bounces higher in Q3, Q4 expected to be far weaker
The US GDP quarterly rate report measures the change in value of goods and services produced in the US over a given quarter compared with the previous and then annualised. The latest data covers the Q3 period and was published on October 26th by the Bureau of Economic Analysis and the next version is out on November 29th.
The latest result of 4.90% was far above expectations and signals that the economy is growing and at a fast pace as it is far higher than the previous quarter and far above the baseline trend.
Trading Economics are forecasting 0.8% for Q4 which would be below the baseline trend of 1.9% and suggest pessimism with regards to future economic growth.
Sources: Bureau of Economic Analysis, Trading Economics, FXStreet
Falling inflation halts in September, applies indifferent pressure to Q3 growth expectations
The US inflation rate report measures the change in value of a basket of goods and services in the US over a given month compared with the previous. The latest data covers the August period and was published on October 12th by the Bureau of Labour Statistics and the next version is out on November 14th.
The latest result of 3.70% was just above expectations and signals that the falling rate of inflation is slowing as it matches the previous month and is above the baseline trend. This applies indifferent pressure to the economic outlook as demand steadies.
Trading Economics are forecasting 3.0% for Q4 which would be close to the baseline trend of 3.1% and suggest indifference with regards to the pace of falling inflation.
Sources: Bureau of Labour Statistics, Trading Economics, FXStreet
Rising retail sales stalls in September, applies indifferent pressure to Q3 growth expectations
The US retail sales report measures the change in value of aggregated retail goods and services sales over a given month compared with the previous. The latest data covers the September period and was published on October 17th by the Census Bureau and the next version is out on November 15th.
The latest result of 0.70% was far above expectations and signals that the rising rate of retail sales is set to continue although it is a minor fall from the previous month, it is on track with the baseline trend. This applies some bullish pressure to the economic outlook as consumers spend more.
Trading Economics are forecasting 0.2% for Q4 which would be below the baseline trend of 0.6% and suggest pessimism with regards to a continuation of rising sales.
Sources: Census Bureau, Trading Economics, FXStreet
Rising payrolls jumps higher in September, applies bullish pressure to Q3 growth expectations
The US non-farm payrolls (NFP) report measures the change in the number of paid workers not employed by farms (due to seasonality) over a given month compared with the previous. The latest data covers the August period and was published on October 6th by the Bureau of Labor Statistics and the next version is out on November 3rd.
The latest result of 336K was far above expectations and signals that the falling rate of payrolls is reversing as it is a big jump from the previous month as well as far above the baseline trend. This applies bullish pressure to the economic outlook as more employees means more consumption.
Trading Economics are forecasting 100K for Q4 which would be below the baseline trend of 211 and suggest pessimism with regards to a reversal of the falling rate of payrolls.
Sources: Bureau of Labor Statistics, Trading Economics, FXStreet
Stable unemployment remains steady in September, applies indifferent pressure to Q3 growth expectations
The US unemployment rate report measures the number of people actively looking for a job as a percentage of the labour force over a given month. The latest data covers the August period and was published on September 1st by the Bureau of Labor Statistics and the next version is out on November 3rd.
The latest result of 3.80% was just above expectations and signals that the stable rate of unemployment may be starting to rise although it does match the previous month and the same as the baseline trend. This applies indifference to the economic outlook as businesses maintain employment levels.
Trading Economics are forecasting 4.0% for Q4 which would be above the baseline trend of 3.7% and suggest some pessimism with regards to a stable labour market.
Sources: Bureau of Labor Statistics, Trading Economics, FXStreet
Geopolitical Events
SUMMARY: The conflict in Israel-Hamas in October 2023, while limited in scope and impact on the wider world, could potentially add uncertainty. If the conflict were to escalate, involving regional powers such as Iran, there might be significant safe-haven flows into the US dollar. The war in Ukraine, which began in 2014 and has seen recent key events in 2023, is already having a negative impact on the global economy and the US dollar. It has caused energy prices to rise, disrupted supply chains, increased inflation, and led to greater demand for the US dollar as a safe-haven currency. Additionally, the ongoing US-China trade war, which began in 2018 and has seen recent developments, has contributed to economic uncertainty, affecting both nations' economies.
October 2023 Israel-Hamas War has the potential to add uncertainty
The ongoing conflict between Hamas-led Palestinian militants and Israel started on October 7, 2023, when Hamas launched a surprise offensive called "Al-Aqsa Flood." This led to thousands of rockets fired into Israel and Palestinian militants breaching the Gaza-Israel barrier, resulting in casualties on both sides. The conflict is part of the long-standing Israeli-Palestinian issue, with increased violence in 2023 leading to this escalation. Hamas cited various reasons for their attack, including the desecration of the Al Aqsa mosque and the Gaza Strip blockade.
The conflict has caused significant displacement of Palestinians and calls for a ceasefire from the United Nations and many countries. Both Israel and Hamas have been accused of war crimes. International reactions vary, with some nations denouncing Hamas as a terrorist group and others focusing on the Israeli occupation of Palestinian territories. Iran has warned against Israeli military aggression.
The conflict is limited in scope and its influence on the wider world. However, if the conflict were to escalate and regional powers such as Iran were to become involved then there are likely to be significant safe-haven flows into the USD.
Russian Invasion of Ukraine Adds Uncertainty
On February 24, 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian War which began in 2014. The invasion is the largest military conflict in Europe since World War II and has resulted in tens of thousands of casualties on both sides. The invasion has also caused a humanitarian crisis, with millions of Ukrainians displaced from their homes. The international community has condemned the invasion and imposed sanctions on Russia. The International Criminal Court is investigating possible war crimes and crimes against humanity committed by Russian forces.
Recent Key Events
June 2023: The Ukrainian counteroffensive in June 2023 made significant progress, with Ukraine liberating villages and reclaiming territory in the eastern Donbas region. The Wagner Group's rebellion against the Russian government was a major setback for Russia.
August 2023: Ukraine counteroffensive slowed by millions of mines laid by Russia. Ukrainian drones damage the Russian landing ship Olenegorsky Gornyak.
September: An attack on Russian naval targets in Sevastopol damages the Black Sea fleet. Several oil and gas drilling platforms on the Black Sea held by Russia since 2015 have been retaken.
The war in Ukraine is having a negative impact on the global economy, including the value of the US dollar. The war has caused energy prices to soar and disrupted supply chains, which are putting upward pressure on inflation and increasing demand for US dollars as a safe-haven.
China-United States trade war adds uncertainty
The US and China have been engaged in a trade war since 2018, with each side imposing tariffs on the other's goods in an attempt to force changes in trade practices. The trade war has had a negative impact on both economies.
Recent Key Events
December 2022: WTO ruled against US tariffs on steel, aluminium, and Hong Kong origin marking. The US is in breach of global trade rules for its tariffs on steel and aluminium, as well as its origin marking requirement for products imported from Hong Kong. The US has disputed the WTO rulings and has not taken any steps to comply.
January 2023: EU and US announce joint effort to block sale of advanced semiconductor chip technology to China.
February 2023: China expands Unreliable Entities List to include US defence contractors.
June 2023: US Secretary of State visits China, seeks to clarify US economic stance, but Chinese officials reject explanation.
July 2023: US Treasury Secretary criticises China's economic restrictions during visit to Beijing, stresses US goal to expand economic partnership.
Gavin Pearson
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Specialises in forex G7 currencies
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