The U.S. dollar declined on Tuesday, though it remained near seven-week highs, as market traders analyzed the Federal Reserve’s monetary policy estimates following last week’s strong employment report.
The Dollar Appears to Be Pausing
Friday’s strong payrolls report prompted traders to reassess the Fed’s rate-cutting path, with a 50 basis point cut in November mostly ruled out in favor of a 25 basis point reduction. The benchmark 10-year Treasury yield, reflecting moderate expectations, held above 4% on Tuesday, while the two-year yield reached its highest level in over a month. This, along with escalating tensions in the Middle East affecting risk sentiment, has helped boost the dollar.
Later this week, several Federal Reserve members will speak, along with the release of September’s inflation report and the minutes from the U.S. central bank’s previous meeting. ING analysts noted, “We have seen a fairly limited impact on the FX market from US 10-year yields hitting the 4% mark, which appears to be the tail end of the payrolls-induced move that has already triggered some considerable repositioning in dollar crosses.”
The analysts added, “There is a possibility that the FX market will cease to be guided by rates now that the Fed’s new 25 basis point per meeting rate path has become the market benchmark. We suspect that this week’s inflation data will not cause major directional changes in the dollar, which may instead respond more to the turmoil in the Middle East and the resulting moves in oil prices.”
The Euro Benefits from German Industrial Production
In Europe, the EUR/USD rose 0.2% to 1.0995. The euro benefited from the release of better-than-expected industrial production data in Germany, as the August figure increased by more than 2.9% more than estimated compared to last month.
Moreover, the less volatile quarter-on-quarter comparison revealed that output was 1.3% lower in the June to August period than in the previous three months.
The European Central Bank meets next week and is expected to ease policy once again, having already cut rates twice this year, as inflation pressures have eased.
GBP/USD and Yuan Developments
GBP/USD was up 0.2% at 1.3104, moving away from Monday’s three-week low of 1.3059. Data released on Tuesday revealed that UK retail sales rose at their fastest pace in six months during September, with total sales rising 2% year-on-year, helped by a 3.1% rebound in food retailers, while non-food transactions fell 0.3%.
USD/JPY fell nearly 0.4% to 147.55, giving back some of the strong gains posted the previous week. Data related to wage growth and household spending also supported Japan’s currency. USD/CNY rose 0.5% to 7.0506 as trading resumed after the weeklong holiday. Sentiment towards China was boosted by a series of stimulus measures from Beijing, including lower interest rates, though this added further pressure on the yuan, especially as US interest rates are now expected to continue rising.
