Main Market Drivers for the USD in November

November 11, 2022 14:16

The high inflation and rising interest rate environment in the US in the first three quarters of this year was supportive of the USD’s value compared to other currencies. One of the few weaknesses was a technical recession in the US and that ended when the economy returned to growth in the third quarter.

This quarter presents different challenges to the USD. As other major central banks pick up the pace of monetary tightening, currencies like the EUR and the GBP are regaining part of the ground lost earlier in the year. What are the main market drivers for the USD in November?

US inflation subsiding

The latest US inflation report shows a downtrend in prices for the fourth month in a row. Annual inflation fell to 7.7 percent in October compared with 8.2 percent in September. This is partly due to lower crude oil prices, but another trend is developing that could feed into inflation over the next few months. As house purchases decline because of higher mortgage costs, the rental prices inched up to 6.9 percent in October versus 6.6 the month before.

What’s the significance of lower inflation? One scenario is that the Federal Reserve might ease up on the size of its monthly interest rate hikes and decide on smaller increases under 0.75 percent. This could drag on the USD’s momentum, but the thinking might be too optimistic. In August, Federal Reserve Chairman Jerome Powell said that inflation would likely rebound if monetary policy were to be loosened too quickly, signaling that the central bank won’t let up until inflation is much closer to the 2 percent threshold.

Another scenario is that the Fed might take lower inflation as a sign that monetary tightening is working. Instead of easing up, the central bank board might maintain its hawkish rhetoric and announce a higher rate hike when it meets on December 13-14. This could support the USD in the first quarter of 2023 but potentially adds to economic growth risks.

There are a few economic developments on the other side of the USD currency pairs which carry weight.

EUR developments

The inflation rate in the Eurozone’s largest economy, Germany, increased to 10.4 percent in October from 10 percent in September. This adds to the likelihood of a relatively high interest rate increase when the European Central Bank (ECB) meets in the middle of next month. After a period of weakness in which the EUR dropped below parity with the USD, the Eurozone’s single currency might gain strength from the market’s expectations of a hawkish stance from the ECB.

The outlook for the EUR could be impacted by Germany’s ZEW Economic Sentiment Index for November. The index remains deep in negative territory as inflation and the war in Ukraine weigh heavily on sentiment.

Growth slows in the UK, impact on the GBP

The UK’s monthly Gross Domestic Product (GDP) fell to minus 0.60 percent in September compared with minus 0.30 percent in August. The possible impact on the GBP might be to further undermine the currency when the USD is strong. Traders are also eyeing the UK’s upcoming inflation rate report for October and an unexpected result could add to the GBP’s challenges.

The Yen and the BoJ’s dovish stance

As the Bank of Japan (BoJ) balances between rising inflation and interest rates regionally and globally, its decisions might be influenced by the country’s Balance of Trade report for October. So far, the BoJ has maintained its dovish stance and kept local interest rates relatively low. If the October Inflation Rate report for October comes out higher than expected, however, it could nudge the BoJ into a policy rethink.

Aussie Dollar and the RBA

With the Reserve Bank of Australia’s (RBA) Minutes release due soon, Australian Dollar (AUD) traders are likely watching for clues about the central bank’s next interest rate decision in the first week of December. The RBA slowed down the pace of its interest rate hikes, moving its guidance up by 0.25 percent at the beginning of the month. Recent comments from RBA Deputy Governor Michele Bullock indicated the central bank might have to raise interest rates a little bit further depending on economic data.

In conclusion, the market outlook for the USD currency crosses might be affected by the RBA’s Minutes, Germany’s inflation rate and sentiment report, the UK’s growth slowdown and Japan’s Balance of Trade report.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.