FX Daily: Watching for monetary policy normalization plays to rotate

DXY hit temporary top, EUR might join GBP recovery
Philip Wee18 Nov 2021
    Photo credit: Unsplash Photo

    DXY peaked at 96.2 on early Wednesday and slid 0.5% to 95.8. Yesterday, we cautioned that 96.1 (50% Fibonacci retracement level) was a major resistance level for the DXY. Today, we draw attention to the EUR, the DXY’s largest component, potentially finding support around the floor of a price channel. During the EUR’s downtrend in 2018, the pace of depreciation flattened within a 1.10-1.15 range after the plunge below 1.15 to 1.13. 

    Despite the Fed hike expectations underpinning the greenback next year, markets will rotate between the G10 countries on monetary policy normalization. Like it or not, CPI inflation in the Eurozone and UK also spiked and closed their gaps with the US. With EU CPI inflation at 4.1% YoY in October, double its 2% target, the European Central Bank’s transitory inflation stance led by President Christine Lagarde and Chief Economist Philip Lane will face more resistance from ECB hawks and large EU nations like Germany.

    Similarly, UK CPI inflation spiked to 4.2% YoY in October from 3.1% in September and core inflation scored a ten-year high of 3.2%. The drop in the claimant count rate to 5.1% in October from 5.2% in September should allay some of the Bank of England’s worry regarding the 1 million workers that were on the government’s furlough scheme that ended on 30 September, the key reason for the BOE’s shock decision not to hike rates on 4 November. With the BOE now seen delivering its delayed hike on 16 December, GBP bottomed at 1.3350 on 12 November and is likely to keep recovering towards its resistance somewhere between 1.36 and 1.37.

    Returning to the US, there is one explanation why the US treasury yield is not significantly higher on US inflation worries. Despite Goldman Sach’s call to bring forward Fed hikes to July 2022, UST 10-year yield fell 5 bps to 1.584% while the 2-year yield eased 2 bps to 0.498%. Some Fed officials argued that pre-emptive rate hikes would not lessen the supply-chain issues fanning inflation pressures. Notably, bond yields and oil prices topped out after US President Joe Biden announced fighting inflation as a top priority and blamed high energy prices for stoking prices. Traders aborted an attempt to take WTI crude oil prices above USD85/barrel on 10 November. Prices plunged another 3.5% to USD78/bbl yesterday, below USD80 for the first time since 4 November. On Wednesday, the president called on the US Federal Trade Commission to investigate if oil and gas companies colluded to keep prices high. The news reported President Biden asking China to cooperate with the US in releasing oil reserves during his virtual summit with President Xi Jinping on Monday. CNBC reported that the Biden administration asked Japan and other countries to release some of their oil reserves. CNN reported that the Biden administration would reopen more than 80 million acres in the Gulf of Mexico to auction for drilling.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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