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The U.S dollar was a star last week, as the monetary policy divergence between the U.S Federal Reserve and other major central banks sent the greenback higher against most of its peers.
The dollar strengthened after New York Fed President William Dudley on Wednesday said that the U.S. central bank will likely raise interest rates later this year if the economy remains on its current trajectory. Furthermore, expectations that Hillary Clinton will win the U.S. presidential election grew strongly after her victory in the third and final U.S presidential debate. This also added to the view that a December rate hike is likely. Fed will hold its next meeting in November. Still, a rate hike ahead of the presidential election is considered as unlikely.
Expectations for higher rates typically boost the dollar by making it more attractive to yield seeking investors. However, it would be misjudged if we didn’t mention the slump of the euro when it comes to the greenback’s strength.
The euro plunged sharply on Friday following comments by the European Central Bank President Mario Draghi that the quantitative easing program would not end before March 2017. President Draghi stated that the central bank had not discuss about tapering its 1.7 trillion euro ($1.86 trillion) asset-buying program, regarding a slow rise in inflation and risks from foreign weak demand.
A string of data for the Euro area will be released next week. The single currency will start its volatility on Monday with Markit flash PMIs for key Eurozone countries (Germany and France) as well as for the whole region. The German Ifo survey out on Tuesday is expected to show a slight improvement in the current conditions index. More economic data for the 28-nation bloc will follow on Friday with the Eurozone’s economic sentiment index and preliminary German inflation numbers.
Following a conference following the policy reviews last Thursday, ECB President Mario Draghi will have another speech about “Stability, Equality and Monetary Policy” on Tuesday.
In the U.S, the most important statistic is probably the release of third quarter growth on Friday. However, other economic parameters such as durable goods orders, housing data and business surveys will keep traders occupied until the key Friday’s Advance GDP, which is forecast to post at the highest since the last quarter of 2014.
If the preliminary third quarter GDP data meets economists’ expectation of a substantial growth rate of 2.5% in the third quarter, the US economy will have a well performance during the second half of the year given the weakness that occurred during the first six months of 2016. Strong economic growth and an improving labor market will give the Fed fewer reasons to delay a rate increase in December.
The Pound ended last week higher versus the U.S dollar thanks to the U.K inflation data, which was reported to have jumped to its highest in nearly two years.
Data from the Office for National Statistics reported that U.K consumer prices added 1% in September compared to the same month a year ago, following a 0.6% rise in the year to August. The reading outstripped expectations of a rise to 0.9%, and reached the 1% rate for the first time since November 2014. ONS said it did not see explicit evidence of the pound’s weakness in consumer-price changes, but it is affecting producer prices as a cheaper local currency pushes up the price of imported goods in the UK.
The rise in the U.K’s inflationary pressures may drive the Bank of England away from its plan to cut rates in order to protect the economy from headwinds created by the departure of the U.K from the single market.
For next week, like the U.S., the U.K. will also announce its preliminary growth estimate for the third quarter, which is due on Thursday. The data will be of more importance than usual as they are for the three months immediately following the Brexit referendum on June 23. . Growth is expected to slow to 0.3% quarter-on-quarter in the three months to September from the previous quarter’s 0.7% rate. Consensus data suggested that the impact of Brexit may not be felt much, as strong consumer spending and a weaker pound have kept the UK economy in a better mood than initially expected . A strong number would damp the need for further easing by the BOE.
The Australian dollar was almost unchanged compared to the level at the start of last week after the market close on Friday. The Aussie stayed strong on the first half of the week through October 21st after the release of the minutes from the RBA’s last meeting. According to the minutes, economic expansion is forecast to continue and stimulate job creation which will eventually result in higher wages and reasonable inflation. The Reserve Bank of Australia held rates unchanged at 1.5% in its October meeting and is widely expected to temporarily pause its rate cut plans at its next meeting on November 1st.
However, the bullish sentiment left the Aussie on Thursday after jobs data showed an unexpected decline in the labour market. In early Asian trading hours, the Australian Bureau of Statistics reported that job creation fell by 9,800 in Australia in September, completely contrasting with forecasts by economists which had called for an increase of 15,200 new jobs added last month.
The jobless rate fell to 5.6% from a revised 5.7% in August as a result of the fact that fewer people participated in the labor force. According to the report, Australia’s participation rate for September dropped from 64.7% to 64.5%, the lowest level in almost two years.
Next week, AUD investors will put their focus on the inflation data due on Wednesday as it could determine whether the Reserve Bank of Australia decides to cut rates anytime soon. CPI in the third quarter is expected to pick up slightly to 0.5% on a quarterly basis and to 1.1% on a yearly basis.
The New Zealand dollar also traded lower against the greenback last week. However, the Kiwi outperformed its Australian counterpart due to upbeat inflation and consumer prices. Next week will be quiet for the currency as only New Zealand’s trade balance is on the calendar.
Canadian dollar plunged the most in the trio of commodity currencies. Retail sales continued to decline while consumer prices grew less than expected. Bank of Canada Governor Stephen Poloz stated that the central bank had “actively” discussed the possibility of injecting more stimulus into the economy.
The Bank of Canada decided to hold its benchmark interest rate at 0.5 percent at its monetary policy meeting on Wednesday, but further stimulus were taken consideration in order to “speed up the return of the economy to full capacity”, Poloz said.
With the lack of Canadian data next week, oil will continue to be a key driver of the currency’s flows.