A collection of good and bad news affecting the foreign exchange market

On November 17, the global foreign exchange market showed a volatile pattern due to the intertwining of many central bank policies turning to expectations, economic data divergence and the easing of geopolitical tensions. The long-short game among major currencies such as the U.S. dollar, euro, and yen intensified, and niche currencies also experienced sporadic fluctuations. The following is a summary of the core good and bad news that affected the foreign exchange market that day to provide a reference for traders.

Good news

The rising expectations of Japanese yen interest rate hikes have received multiple supports. The yen is enjoying key benefits. The Bank of Japan meeting minutes released on November 10 show that board members generally believe that the conditions for further normalizing policy interest rates are basically in place, and that an interest rate increase may be implemented in December. At the same time, Japan's largest union alliance will set high goals for the next round of wage negotiations, which is expected to continue the largest wage growth in 34 years and provide an economic foundation for raising interest rates. In addition, central bank official Junko Nakagawa reiterated that interest rates will be raised when economic prices reach standards, and 98% of respondents predicted that interest rates will be raised before January next year. Multiple signals pushed the yen away from the previous eight-month low, forming strong support for the yen.

The economic recovery in the Eurozone shows positive signs. The Eurozone's GDP grew by 0.2% quarter-on-quarter in the third quarter, higher than the 0.1% in the second quarter, and the pace of economic recovery has accelerated slightly. Among them, France performed well, with GDP growing by 0.5% in the third quarter from the previous quarter, continuing to inject momentum into the euro zone economy. In terms of inflation data, the harmonized consumer price index increased by 2.1% year-on-year in October, close to the European Central Bank's 2% target, and price pressures were further eased. at the same timeThe final value of the euro zone's manufacturing PMI in October rose to 50.0, temporarily out of the contraction range. These positive data provide fundamental support for the euro exchange rate.

The end of the U.S. government shutdown boosted risk currencies. The two parties in the United States reached a temporary spending agreement on November 9, ending the nearly five-week government shutdown. The shutdown caused a direct loss of US$20 billion. Its end significantly boosted global market risk appetite and cooled risk aversion. This change is good for risky currencies such as the euro and the Australian dollar, and at the same time promotes the outflow of funds from safe-haven assets such as the U.S. dollar, creating a favorable environment for non-U.S. risky currencies.

Bad news

The sharp drop in expectations for a rate cut by the Federal Reserve supported the dollar's suppression of non-US currencies. The Fed's hawkish remarks continue to ferment, and St. Louis Fed President Mussallem is skeptical of further easing, stressing that the current policy is loose enough. The market's expected probability of a rate cut in December dropped sharply from 91.7% to 63.4%. The U.S. non-farm payroll data for October was solid, with core inflation still above the 2% target, reinforcing expectations of “higher and longer” interest rates. The inversion in the interest rate differential between China and the United States has widened to more than 200 basis points. Emerging market currencies such as the RMB are facing capital outflow pressure, and the offshore RMB exchange rate has experienced slight fluctuations.

Economic differentiation within the euro zone restricts the strength of the euro. Although the overall data in the euro area is improving, internal conflicts restrict the upward trend of the euro. Germany's GDP in the third quarter grew only 0.3% year-on-year, and its manufacturing PMI in October was 49.6, still in the contraction range; while France's manufacturing PMI in the same period was 48.8, highlighting the problem of weak demand. Inflation differences among member countries are significant. Germany's HICP rose by 2.3% year-on-year in October, which was higher than the target, while France continued to be lower than the target. This differentiation puts the ECB's monetary policymaking in a dilemma, making it difficult to introduce unified stimulus policies and suppress the rising momentum of the euro.

The pound is under double pressure from the risk of stagflation and expectations of interest rate cuts. Although the Bank of England kept interest rates unchanged at 5.25%, the market expects a first interest rate cut in early 2025. The British economic growth is weak, and the GDP forecast for 2024 has been lowered to 0%. At the same time, inflation expectations have been raised, and the risk of stagflation has intensified. Against the background of the global economic slowdown, the British pound, as a non-traditional safe-haven currency, has become less attractive than the U.S. dollar. Data on November 17 showed that the exchange rate of the British pound fell by 2.04% against the Madagascar Ariary and also showed a weakening trend against currencies such as the Icelandic krona. The short-term decline is difficult to change.

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