With the Fed meeting on Wednesday, November 2, the US dollar experienced heavy volatility last week, while this week also fluctuations can be even more intense. We already had mid-term elections and now waiting for results, while Fed speakers across the week are supposed to give us more details about their future plans.
Last week the dollar index dropped to 110.6 ahead of the Fed policy meeting, then climbed above 113 mid-week before collapsing to 110.7 on Friday. This reduction continued this week as well, all way down to 109.35 on Tuesday. However, on Wednesday, along with elections, DXY also could regain some of its losses.
‘Red wave’ fails to materialize as it was expected!
Bond yields also decreased in line with the USD rate. 10-years treasury yields decreased under 3%, after touching 4.7% last week, however, this week could again recover back above 4%. Currently, US 10-year bond yields triggering above 4.12%. Higher risk sentiment and yields have been prevalent throughout the year, increasing the safe-haven dollar’s appeal, which is expected to continue.
Last week and after the Fed meeting, we had the US labor market data as well. On Friday, US labor data for October was mixed. Nonfarm payrolls rose by 261,000 newly created jobs, which was the smallest gain since December 2020. At the same time, September payrolls were revised up by 52,000 to 315,000, while August payrolls were revised down by 23,000 to 292,000. In addition, with a slight decrease in the participation rate to 62.2%, from 62.3% of estimates, and last month, the unemployment rate increased to 3.7% from 3.5%. On the other hand, the average weekly hours worked was recorded at 34.5, in line with market expectations and no change from last month. In terms of average hourly wages, the monthly rate was recorded at 0.4%, slightly higher than the 0.3% of estimates, while the annual rate was recorded at 4.7%, in line with market expectations.
While today everything was about the election later this week, we are waiting for inflation numbers. We do not have the full results yet, however, with the number we have so far, Republicans going to have the majority of the House of Representatives, which was expected. While the Red wave was not as powerful as expected, and the Senate seats are divided 48 to 48 so far.
On the inflation front, CPI rose by 0.4% in September, reaching 8.2% on an annual basis, dropping only slightly from last month’s 8.3%. With this price pressure that continues, pressure on the Federal Reserve also increases to continue with its policy of monetary tightening.
All signs together show that despite recent weakness, it is still early to talk about USD weakness. Especially if Inflation numbers do not have serious signs of decline, the US dollar index will prepare to increase to new levels before year-end. On the flip side, a relative decrease in inflation can keep alive hopes for rising stock markets, which means a weaker dollar and lower bond yields.