The dollar index (DXY00) has shown a notable increase of +0.63%, reaching a 1.5-week peak. This momentum is largely attributed to a positive response from the previous day’s market activity, where Federal Reserve Chair Jerome Powell refrained from providing any specific signals regarding a potential rate cut in the upcoming FOMC meeting. This ambiguity suggests that the Fed may adopt a less dovish stance than what financial markets had anticipated. Additionally, the dollar is receiving support from a downturn in the EUR/USD pair, particularly following an unexpected decline in a key gauge of German business sentiment.
In a surprising twist, US new home sales for August surged by +20.5% month-over-month, hitting a 3.5-year high at 800,000 units, vastly exceeding forecasts that had predicted a decrease to 650,000 units.
Market predictions currently indicate a staggering 93% likelihood of a -25 basis point cut during the next FOMC meeting scheduled for October 28-29.
The euro, represented by the EUR/USD (^EURUSD), has dropped by -0.69% today, largely due to the strength of the dollar.
This decline is further influenced by disappointing results from the German September IFO business climate index, which fell to a 4-month low unexpectedly.
Moreover, the euro faces additional pressure from the divergence in central bank monetary policies, with the European Central Bank (ECB) appearing to have reached the end of its rate-cut cycle while the Fed is expected to implement around two more rate cuts before year’s end.
The German September IFO business climate index declined by -1.2 points, reaching a 4-month low of 87.7, contrasting sharply with expectations for an increase to 89.4.
In comments made by ECB Executive Board member Cipollone, it was stated that “risks on inflation in the Eurozone are very balanced,” indicating no immediate threats to inflation in either direction as current interest rates are deemed well-positioned.
Market swaps reflect only a 1% likelihood of a -25 basis point cut by the ECB during its meeting on October 30.
Turning to the USD/JPY (^USDJPY), the dollar is up by +0.77%. The yen has weakened to a 2.5-week low against the dollar amid reports of weakness in Japan’s manufacturing sector, highlighted by a contraction in the Japan September S&P manufacturing PMI, which saw its sharpest decline in 6 months. Concurrently, increasing Treasury note yields are exerting additional pressure on the yen. On a brighter note for the yen, Japan’s Ministry of Finance has announced plans to reduce long-term government debt issuance for the second time this year.
Additionally, Japan’s August machine tool orders saw a revision upwards, now reported at +8.5% year-over-year, as opposed to the previously noted +8.1%, marking the largest annual increase in five months.
