Foreign exchange trading reminder on October 25: Powell issued an inflation warning, the dollar's decline narrowed, the safe-haven currency rose

On Friday (October 22), the U.S. dollar index fell 0.15% to 93.62, which was the second consecutive week of decline; the US short-term Treasury yield rose, and the 2-year yield rose to its highest level since March 2020, and then pared the gains.

Mazen Issa, a senior foreign exchange strategist at TD Securities in New York, pointed out that there are now some positions being sold out. We have clearly seen that the US dollar has strengthened since the Fed meeting in September, which also coincides with the seasonal trend of the US dollar weakening before the end of the month. However, Issa expects the U.S. dollar to regain momentum, as global central banks may respond to aggressive bets on interest rate hikes, while the Fed may maintain a relatively hawkish stance and continue to scale back its bond purchase plans. Once we are hit back by other central banks and the Fed promises to reduce the scale of bond purchases, we should see that the dollar's decline is really shallow.

Data show that business activity in the United States increased steadily in October, which shows that despite the shortage of labor and raw materials hindering the manufacturing industry, as the new crown pneumonia epidemic subsided, economic growth accelerated in the beginning of the fourth quarter.

Brown Brothers Harriman's Win Thin wrote that in view of the strong US data and the wide expectation that the Fed will announce a cut in the November 2-3 meeting, we believe that US interest rates and the US dollar will continue to trend upwards.

Fed Chairman Powell’s concerns about continued high inflation in his latest speech have increased. He made it clear that he will soon begin to reduce the scale of bond purchases, but he will remain patient in raising interest rates.

Powell said at an online event hosted by the Central Bank of South Africa on Friday that the supply bottleneck may last longer and stimulate inflation, which is obviously a risk now. Our policy has been fully prepared for a series of possible results. I do think it is time to reduce the size, but it is too early to raise interest rates. The risk is that the current inflation rate will begin to cause commodity prices and wage level makers to expect excessive inflation in the future, which may eventually prompt the Fed to take action.

Powell added that the most likely scenario is that as the supply bottleneck eases (and I believe it will eventually), inflation will fall. If we find that the inflation rate is likely to continue to rise, we will definitely use tools to ensure price stability, and we will also consider the impact of this on our goal of achieving full employment. It is too early to tighten monetary policy by raising interest rates, because if employment is expected to recover strongly and supply chain problems may be alleviated, a rash interest rate hike will drag down employment growth. If the labor market recovers and the supply problem is resolved, the economy should be boosted.

Neil Dutta, head of economics at Renaissance Macro Research, said Powell sounded less anxious about employment, and he was more worried about inflation.

More and more investors expect Fed officials to start raising interest rates as early as the middle of next year. In recent weeks, due to bad news on inflation, the money market’s expected interest rate hike schedule has been advanced.

Diane Swonk, chief economist at Grant Thornton LLP, said that the Fed has actually been chasing inflation for decades, and it is time for the Fed to admit that inflation is higher than expected and last longer.

After the U.S. dollar index hit a one-year high last week, investors took profits. At that time, concerns that inflation would remain high for a longer period of time prompted investors to advance the time of the Fed's first rate hike to mid-2022.

The euro rose 0.17% against the dollar to 1.1643; as risk appetite weakened, the dollar fell 0.44% against the yen in late trading to 113.49; the dollar fell 0.34% to 0.9151 against the Swiss franc, the lowest level in a month.

The British pound underperformed. The pound fell 0.4% against the U.S. dollar, the biggest drop in two weeks; the cost of hedge against inflation risk in the next ten years in the UK rose to its highest level in 25 years. The chief economist of the Bank of England said that the decision on whether to raise interest rates next month is still inconclusive, and the debate is "quite balanced", but implies that any future policy tightening need not be too strict. Societe Generale’s Kit Juckes wrote that the pound rebounded from 1.34 to above 1.38 in October and will struggle here and then reverse the trend-either now or after the Bank of England monetary policy meeting on November 4.

The risk willingness indicators of the Canadian dollar, Australian dollar and New Zealand dollar gave up earlier gains against the US dollar, and were basically the same in late trading compared to the previous trading day.

Summary of Institutional Views

United Overseas Bank: The rise of the euro against the dollar weakens, looking towards 1.1590

UOB technical analysis believes that the upward momentum of the euro against the dollar has weakened. It is currently looking towards 1.1590. The previous day emphasized the bullishness. However, any upward trend is unlikely to challenge the important resistance at 1.1680. Then it rises to 1.1667 and then unexpectedly falls back sharply. Continue to fall, but there is little chance of breaking through the strong support of 1.1590. On the upside, the initial resistance is at 1.1635. Breaking through 1.1650 indicates that the downward pressure has eased.

Societe Generale: USD/JPY will be revised downwards

Societe Generale expects that the USD/JPY will correct downwards, but will hold 113.30. A preliminary correction cannot be ruled out. However, the 23.6% correction from August at 113.30 may provide support, as long as the high level of 112.23/111.65 in 2020 is held. There will not be a sharp fall, and the break above 114.70 may continue to rise, moving towards the next target, which may be 115.50/115.85 and 116.50.

ANZ Bank: In the context of rising global inflation, the New Zealand dollar is expected to rise sharply against the US dollar

The New Zealand dollar has risen continuously in the past two weeks, and ANZ expects that the New Zealand dollar will continue to advance with the support of several factors. The New Zealand dollar is expected to rebalance rather than fall back. It is still believed that the New Zealand dollar will benefit from the interest rate hike, thus affirming the scope and confidence of the Reserve Bank of New Zealand on inflation. In the context of rising global inflation, it is logical that the New Zealand dollar should strengthen to ease the shock.