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Forex: USD strengthens ahead of the Fed meeting

The US dollar is strengthening against its peers on Monday. EUR/USD is trading flat on the day, while GBP/USD is down 0.33% and the dollar is up 0.2% against the Japanese yen.

Elsewhere, high-beta currencies with the AUD down 0.2% versus the dollar, while ZAR and MXN – two proxies for risk-on sentiment in emerging markets – lost 0.64% and 0.8%, respectively, against the greenback. 

US dollar 

The US dollar is higher on Monday as the market awaits the Federal Reserve’s meeting on Wednesday, which is expected to announce the start of its asset purchase tapering.

The DXY index – that tracks the dollar against a basket of other currencies – is trading at 94.23 and has recovered last week’s losses on the back of another strong PCE inflation print in September (0.3% on month), which raised market expectations for a more hawkish policy reaction by the Fed.

On Friday, the greenback was also helped by a surprising Employment Cost Index jump of 1.3% in Q3, much higher than the consensus estimate of 0.9%, indicating that labour market frictions continue and companies are increasing wages to attract workers to satisfy pent-up demand.

Today the macro focus is on the release of the ISM Purchasing Manufacturers Index (PMI), which is expected to fall slightly from 61.1 in September to 60.3 in October. 


The euro is flat against the US dollar on Monday, after a weak session last Friday marked by the release of macro data in the US and the confirmation by the European Central Bank of a dovish stance towards rising pricing pressures in the Euro Area the day before.

The flash estimate on Euro Area core inflation in October shows an increase of 0.2% to 2.1% on the year, 0.2% above expectations, while headline inflation increased by 0.7% to 4.1% on the year, mainly due to rising energy prices. Q3 GDP (flash) in the Euro Area expanded by 2.2% on quarter, beating market expectation of a 2% rise.

On Monday, Germany retail sales fell 2.5% on month in September 2021, after a revised 1.2% increase in August and falling short of market estimates of a 0.6% increase.

British pound

The pound has weakened by 0.2% on the day against the dollar, ahead of Thursday’s Bank of England (BoE) meeting.

In previous weeks, investors had been betting on an early tightening of the BoE, with an implied rise of 15 basis points at the next meeting and interest rates seen at 1% in a year.

BoE Governor Andrew Bailey recently said the central bank “will have to act” to curb price pressures resulting from rising energy prices.

Since August, consumer price index inflation in the UK has been over 3% on a year-on-year basis, and last week the Office for Budget Responsibility forecasted that it will average 4% next year.

Japanese yen

The yen fell 0.2% against the dollar after Japan’s surprise victory in Sunday’s lower house elections, cementing Prime Minister Fumio Kishida’s stance and paving the way for additional fiscal stimulus.

On the data front, the Jibun Bank Japan Manufacturing PMI was revised up to 53.2 in October 2021 from 51.5 a month earlier, with factory activity expanding for the ninth month in a row, the fastest since April, as Covid-19 restrictions have been eased throughout the country.

Australian dollar

The Australian dollar is sliding 0.2% against the dollar on Monday, ahead of the Reserve Bank of Australia’s monetary policy decision on Tuesday.

The critical issue the market is looking at is whether policymakers would abandon their yield-curve-control approach.

The Australian dollar little reacted to Friday’s surprising decision by the Reserve Bank of Australia not to intervene to defend its 10bp target on the April 2024 bond, which is now trading at a yield of 1%.

On Monday, the IHS Markit Australia Manufacturing PMI was revised up to 58.2 from 57.3 as Covid-19 restrictions relaxing in several regions of the country, while new owner-occupied house loans in Australia fell 2.7% in September.

G-10 central banks’ meetings of this week:

  • November 2: Reserve Bank of Australia Interest Rate Decision (consensus on hold at 0.1%)
  • November 3: US Fed Interest Rate Decision (consensus on hold at 0.25%)
  • November 4: Bank of England Interest Rate Decision (consensus on hold at 0.1%)
  • November 4: Norges Bank Interest Rate Decision (consensus on hold at 0.25%)

Chart of the day: Short-term bond yields in US, UK, Canada and Australia jumped in October as market speculated on more aggressive central banks’ policy reactions.

Image of short-term bond yield in some DMDM short-term bond yields rose in October – Credit: Koyfin

Forex Heatmap – November 1, 2021

Table of Forex performanceFX Performance as of November 1, 2021 – Data: Refinitiv

Read more: These two forex pairs are reaping benefits of the oil rally

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