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The euro is at its highest levels in a week despite inflation slowing as the dollar and yen weaken

Today's Market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

 

October 31, 2023 (Investorideas.com Newswire) The euro achieved notable gains today against the major currencies. The euro against the dollar (EUR/USD) reached approximately 1.06700 at around ten in the morning GMT, which is the highest since last Tuesday. At the same time, against the British pound, the euro reached the level of 0.87517, which is the highest since the fifth of last May. Also noticeably, the euro reached its highest record level against the Japanese yen since September 2008, at 160.852.

Today's euro gains come despite figures indicating a significant decline in inflation in the euro zone. The preliminary reading of the Consumer Price Index (CPI) recorded the weakest growth since July of the year 2021, at 2.9% during this October compared to the same month last year, which is a reading below expectations of 3.1%.

As for the level of core inflation, it recorded growth at 4.2% on an annual basis, in line with analysts’ expectations, but it came below the previous reading of 4.5%.

In addition, retail sales in the euro area continued to contract more than expected last September by 4.3% on an annual basis, which is the highest rate of contraction since last April.

It seems that the effects of monetary tightening in the Eurozone have begun to become increasingly apparent, as we have seen today in the larger-than-expected decline in retail sales and the decline in inflation, in addition to the contraction in manufacturing and services activities that we witnessed last week, whether in Germany, France, or the Eurozone in general.

Although the European Central Bank (ECP) stopped raising interest rates during its last meeting, tight credit conditions may hinder the restoration of growth and recovery for a longer period than expected, and this is what the markets may seem optimistic will not happen after the recent negative economic numbers. Even if the ECP stops raising interest rates, they may remain at their record levels for a longer period than expected, with inflation rates remaining far from their targets.

Long-term European government bond yields are still near the highest levels since 2011, which will contribute to pressure on borrowing costs to remain high, which may continue to hinder growth.

Support for the euro today comes as the US dollar continues to decline, a day before the Federal Reserve announces its decision on the interest rate. While the markets believe that the central bank will not change the current rates, despite the recent economic figures that indicate the continued expansion of the US economy and the strength of the labor market. While also the markets widely believe that the Federal Reserve has already finished raising interest rates, the question remains as to when it will start to cut it, which appears to not happen before the second half of 2024.

While US Treasury bond yields continued to decline today. Ten-year bond yields reached their lowest levels in about a week, at 4.180%.

As for Japan, the yen's sharp declines against the euro came after the Bank of Japan's (BoJ) monetary policy meeting, in which the central bank indicated more clearly its intention to abandon the yield curve control policy, allowing for more of its loosing monetary policy. The BoJ kept its target for ten-year bond yields at 0%, but the upper/lower band at 1% on either side of zero has become a reference number only, which may allow the bank to avoid intervening in the market as yields approach the maximum allowed rate.

It appears that the BoJ is still very cautious in intervening and pushing for monetary tightening in light of the negative economic numbers. At the same time, this step will allow the bank to buy more government bonds in order to pump more liquidity into the markets, which may support growth.

With this news, the yield on ten-year government bonds rose to new record levels not seen since 2013, at 0.957%. This coincided with the continued sharp decline in Japanese bond markets, with the BRJ iShares Core Japan Government Bond ETF (2561), which tracks the performance of Japanese government bonds, reaching a new historical low of 2380 at dawn today. However, this sharp rise in bond yields today did not help the Japanese yen to stop its decline against the major currencies.

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