The Dollar Index (DXY) has softened a little this week – largely in response to overseas events. Here the third-quarter eurozone growth data and October German price data were stronger than expected and have prompted the market to scale back expectations of a 50bp ECB rate cut this December, ING’s FX analyst Chris Turner notes.
“And this morning we have just seen USD/JPY drop nearly 1% on Bank of Japan Governor Kazuo Ueda's press conference outlining a plan to continue with rate hikes should the BoJ's forecasts be realised. Most recently the market had felt the BoJ would be less likely to hike on the back of uncertain political developments and potentially a more dovish make-up of the Japanese government.”
“That brings us to the USD. Dollar strength this month has all been about a market positioning for a Donald Trump win and US rate spreads widening in favour of the dollar as the Rest of the World turns more dovish. Well, it seems that the ECB and BoJ may not be quite as dovish as some had feared – news that could potentially cap the dollar's rally for the time being.”
“Given that background, a sticky core PCE deflator today – the Fed's preferred price gauge – at 0.3% month-on-month may not need to send the dollar that much higher. DXY is currently on support at 104.00 and after one-way bullish traffic for over a month, may be due a modest correction to the 103.65 area.”
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