EUR/USD slips to 1.13 while inflation data supports sterling
13:32, 17 November 2021
The bearish momentum on the euro continued on Wednesday with EUR/USD slipping below the psychological level of 1.13 in early Asian trading and settling around the 1.1310 to 1.1315 area.
Monetary policy divergence between the Fed and the European Central Bank (ECB) remains the main driver behind the recent performance of the pair. The yield spread between the 2-year US Treasuries and 2-year German Schatz reached 125 basis points, the widest since mid-March 2020.
A higher than expected UK inflation rate supported the British pound this morning, in particular against low-yielding pairs such as the EUR and CHF, strengthening the case for a December Bank of England rate hike.
The Australian dollar (AUD) is the worst performer of the day among the majors, as central bank governor Philip Lowe yesterday reiterated that interest rates could remain unchanged for longer, while the Kiwi (NZD) rebounded from previous losses in the run up to the November 24 meeting of the Reserve Bank of New Zealand (RBNZ), which could offer another rate hike.
The Japanese yen experienced another negative session against the dollar, with USD/JPY up 0.5% yesterday and trading at its highest level since March 2017.
The Norwegian krone (NOK) recorded its fifth straight day of losses against the dollar, after rumors that the Biden administration asked to release US oil reserves to lower global crude prices.
Elsewhere, the South African rand (ZAR) weakened as inflation data didn’t surprise market expectations to the upside, while the Turkish lira (TRY) hit new all-time lows against the dollar. The Russian ruble (RUB) stands out among emerging market currencies, strengthening 0.2% against the greenback, as natural gas rose after the German authorities suspended the certification of Nordstream 2 project.
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Forex Daily Matrix – 17 November 2021
Forex daily matrix as of 17 November 2021, 11:00 GMT – Credit: Capital.comUS dollar
As of writing, the US Dollar Index (DXY) was last at 95.91 level, flat from previous close.
The DXY is trading close to its highest level since July 2020 as US data continues to outperform, fuelling market expectations on more aggressive interest-rate hikes next year by the Federal Reserve.
On the data front, retail sales rose by 1.7% month-on-month in October, following a 0.8% increase in September and surprising market consensus (1.4%). Industrial production also came in stronger than expected, rising by 1.6% month-on-month in October, above consensus (0.9%).
Money markets are now assigning a 68% probability that the US Federal Reserve will start hiking interest rates as early as June next year.
This week the focus could be on the US Senate’s vote to nominate the next Fed chair, as Biden announced yesterday. The online forecast market (Predictit.org) suggests that the odds of Powell being re-elected have fallen to about 60% from 75% last week, while the odds for Brainard have risen to 40% from 25%.
DXY technical levels:
- 52-week high: 96.16
- 52-week low: 89.212
- 50-day moving average: 93.85
- 200-day moving average: 92.18
- 14-day Relative Strength Index (RSI): 72.85
Chart of the day: Correlation between USD/EUR and US/Germany short-term bond spread
USD/EUR vs US/Germany 2-year yield spread – Credit: KoyfinEuro
The euro was last at 1.1313 against the US dollar, after five straight sessions of losses.
Earlier this week, ECB President Christine Lagarde provided a dovish message, saying that raising interest rates next year would not be an option on the table despite higher for longer inflationary pressures.
The final reading of the euro area inflation rate for October came in at 4.1% year-on-year, in line with market expectations. Core inflation rose to 2% year-on-year in October, but below consensus (2.1%).
On the technical front, EUR/USD continues to trade in the oversold area, marked by the relative strength index (RSI) at 26 in the daily timeframe chart.
EUR/USD technical levels:
- 52-week high: 1.2349
- 52-week low: 1.1265
- 50-day moving average: 1.1624
- 200-day moving average: 1.1870
- 14-day Relative Strength Index (RSI): 26.04
British pound
GBP/USD is hovering around 1.3427 in London midday trading, broadly unchanged from previous close.
Yesterday, the sterling strengthened by 0.5% against the euro, with EUR/GBP falling to 0.842 – the lowest since February 2020.
Inflation in the UK rose to 4.2% year-on-year in October 2021, above market expectations of a 3.9% increase and the highest level since December 2011. Core inflation, which excludes energy and food from the basket, was also stronger than expected, jumping to 3.4% year-on-year well-above a forecasted 3.1% increase.
A higher than expected inflation, along with a strong recovery in the UK job market, is now raising the likelihood of a Bank of England rate hike cycle starting in December.
GBP/USD technical levels.
- 52-week high: 1.4248
- 52-week low: 1.3104
- 50-day moving average: 1.3640
- 200-day moving average: 1.3834
- 14-day Relative Strength Index (RSI): 38.19
Forex Performance Heatmap – 17 November 2021
Forex performance heatmap as of 17 November 2021, 11:00 GMT – Credit: Capital.com