The dollar stabilized during Asian trading, Tuesday, after volatile movements in recent days, with investors reluctant to take new positions ahead of the release of US inflation data, which may enhance expectations of raising interest rates and give the US currency additional support.
The dollar was under pressure on Monday, with the decline in oil prices and the rise of global stocks, which prompted investors to shift towards riskier assets. This decline erased the gains achieved by the US currency on Friday, following the release of strong US labor market data.
The Australian dollar, which is sensitive to trade and risk appetite, rose by about 1 percent during Monday's session to $0.6921, while the New Zealand dollar rose to $0.5624, and both stabilized during morning trading in Asia.
The euro also rose 0.7 percent overnight to $1.1220, compensating for its losses recorded on Friday, when strong US jobs data strengthened the dollar and interest rate expectations. The euro and dollar pair settled in the middle of a trading range that lasted about a month.
These moves come at a time when investor positions are still leaning towards the dollar, which has achieved gains since the beginning of the year, after early expectations of a reduction in US interest rates turned into bets on increasing them, following the rise in energy prices and inflation as a result of the US-Israeli war with Iran.
Strong US employment data for October, which showed employment rising more than double expectations, has increased these bets, with markets pricing in an 85 percent chance that the Federal Reserve (the US central bank) will raise interest rates next month.
Inflation shapes the direction of the dollar
Markets are awaiting the US Consumer Price Index data for October, amid expectations of economists polled by Reuters that general inflation will rise to 3.9 percent, and core inflation to 2.8 percent on an annual basis.
Analysts believe that a reading higher than expectations will enhance interest rate hike bets, which may push the dollar higher. Emre Spizer, a strategist at Westpac in Auckland, said the margin for pricing an additional increase in December is limited, but expectations for subsequent meetings may see a further rise.
Markets are currently pricing in two increases in US interest rates by the middle of next year, but these expectations are facing some pressure with the turmoil in shares of artificial intelligence companies, amid fears that a Democratic victory in the midterm elections will lead to tightening regulations and slowing down the investment boom in the sector.
In the major currency markets, the pound sterling stabilized at $1.3441, maintaining its position within a trading range that lasted about a year and a half, benefiting from the support it received after the Bank of England raised interest rates last week for the first time in three years.
As for the Japanese yen, it traded at 157.97 against the dollar, while continuing to benefit from the possibilities of Japanese authorities intervening to support it. Monday's data showed that Japan sold about $97 billion of its reserves to defend its currency until late July and August, after it approached its lowest levels against the dollar in four decades.
The possibility of the authorities intervening again continues to limit the yen's decline, despite the decline in bets on raising Japanese interest rates in December.
Asian stocks rose on Tuesday, supported by a decline in oil prices and a decline in inflationary fears, after US President Donald Trump announced the suspension of new military strikes against Iran for the time being, while markets awaited US inflation data that may shape interest rate expectations during the coming period.
The recovery came in the wake of the decline in oil prices to their lowest levels since the beginning of September, with Brent crude falling below $100 a barrel, amid investors’ hopes for the possibility of resuming talks between Washington and Tehran. Crude oil recorded about $91.56, down by about 1 percent during Asian trading.
The South Korean Kospi index rose by more than 5 percent, while the Japanese Nikkei index rose by about 3 percent in early trading. The broader MSCI index of Asia-Pacific stocks also increased 1.5 percent, moving away from the lowest level in seven months recorded last week.
The wave of recovery extended to Wall Street on Monday, as the Standard & Poor's 500 index recorded its largest daily gains since April, rising 2.35 percent, while the Nasdaq index rose 2.7 percent, achieving its best daily performance in more than four months.
Nick Tweddell, chief market strategist at ATFX Global, said that recent developments raise hopes that the end of the conflict is approaching, but he warned that the gap is still large between the diplomatic track and reaching a sustainable peace agreement. He added that faltering negotiations could lead to a strong return in prices, with investors repricing geopolitical risks.
The decline in stocks last week was also linked to fears of the impact of the Democrats’ broad victory in the US midterm elections on technology companies, in light of the possibilities of tightening regulations that may affect the momentum of investment in artificial intelligence.
Technology stocks are still under the microscope, with the results of a number of companies awaited this week, including Core Wave, which is an indicator of investors’ appetite for the artificial intelligence sector and the costs of expanding its infrastructure. Attention is also focused on Nvidia, after it announced that its board of directors is investigating reports about the possibility of its CEO, Jensen Huang, being targeted by a foreign intelligence operation. The company's shares fell 4.2 percent.
Inflation and interest
In debt markets, attention is turning to the US Consumer Price Index data for October, scheduled to be released later Tuesday, amid economists’ expectations for a rise in general inflation by 0.3 percent on a monthly basis, and an increase in core inflation by 0.2 percent.
The data is of particular importance in light of the growing market bets on the Federal Reserve (the US central bank) raising interest rates in December. The CME Group's "Feed Watch" tool showed that the odds of an increase rose to 84 percent, compared to 74 percent a week ago, following the release of strong data on the US labor market for October.
The yield on two-year US Treasury bonds, the most sensitive to interest rate expectations, rose by 1.4 basis points to 4.56 percent, while the dollar stabilized during Asian trading.
Oil prices fell on Tuesday, continuing the losses of the previous session, after US President Donald Trump reduced the possibility of resorting to new military action against Iran at the present time, which allayed fears of continued supply disruptions in the Middle East region.
Brent crude futures fell 70 cents, or 0.75 percent, to $91.88 per barrel by 2:46 GMT, while US West Texas Intermediate crude futures fell 78 cents, or 0.90 percent, to $86.07. The two crude oil prices had recorded a decline of about 1 percent earlier in trading.
This came after Brent ended Monday's session down 5.85 percent, after falling to its lowest levels since August 31.
Trump said on Monday that he intends to suspend carrying out new military strikes against Iran for the time being, in response to appeals from countries in the region, including Qatar, following talks at the White House with the Qatari Prime Minister. But he pointed out that the naval blockade in the Strait of Hormuz continues at the current stage.
Tim Waterer, chief market analyst at KCM Trade, said that the markets still prioritize the more conciliatory tone that Trump has adopted towards Iran since the US midterm elections.
He added that attacks on ships in the vicinity of the Strait of Hormuz are still continuing, but have not escalated to a level that prompts markets to add a new risk premium to oil prices.
In terms of supplies, OPEC production rose in October, according to a Reuters survey, driven by increased production in Saudi Arabia, Kuwait and Iraq, despite continued restrictions on exports.
Brent had fallen by about 22 percent from the highest level in six months, amounting to $118 a barrel, which it recorded on October 30, with the decline of fears of an American escalation against Iran following the midterm elections.
However, the risk of disruption to freight traffic remains. Gregory Brough, chief analyst at the Eurasia Group, said that prices are unlikely to fall below $90 for Brent crude unless more sustainable indicators of reducing escalation and reaching an agreement between Washington and Tehran appear, warning of the continued dangers to navigation in the Strait of Hormuz as Iran continues to attack ships passing through it.
