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2022 October Outlook for G7 Currencies

2022 October Outlook for G7 Currencies

Dollar, Euro and Pound

Dollar pared gains as Fed considered easing its pace of tightening cycles

Fed had previously raised rates by 75 basis points and signalled that the pace of future rate hikes may slow. However, Powell’s comments led to a reversal of bets that the Fed would cool down the pace of rate increases, causing the US 10-year Treasury yield to return above 4%. The dollar also initially sank after the FOMC decision but pared most of its losses as investors acknowledged that the Fed is not ready to pivot yet and that borrowing costs could rise even higher than previously anticipated.

ECB raises interest rates for second consecutive time, signals more increases to come

The euro has strengthened past dollar parity to reach a six-week high, due in part to increasing bets that the Federal Reserve will have to slow the pace of its interest rate hikes. The European Central Bank is also expected to deliver a second consecutive 75 basis points rate hike, which would raise borrowing costs to their highest level since 2009. At the same time, the ECB has signalled its intention to begin unwinding its 5 trillion-euro balance of government bonds and to tighten conditions for TLTRO loans, potentially putting pressure on European banks. Flash PMI estimates show that the Eurozone economy has entered a steeper downturn at the beginning of the fourth quarter, with GDP falling at a rate of around 0.2%.

Pound touches 6-week high against dollar after Sunak’s appointment

The pound has reached its highest level since mid-September against the US dollar, breaking above the 1.15 mark, following the appointment of Rishi Sunak as the new Prime Minister of the UK. During his first speech, Sunak emphasized the importance of economic stability and confidence in the government’s agenda, which provided some reassurance to markets that had been rattled by the former Prime Minister’s mini budget. Sunak also announced that he will delay the release of an economic strategy, originally planned for Monday, until November 17. Investors are also anticipating another interest rate increase from the Bank of England next week, which is expected to be a 75-basis point hike that will bring borrowing costs to their highest level since 2008. This comes as UK consumer inflation reached a 40-year high of 10.1% in September, indicating that policymakers may need to take further action to bring it down. The pound’s strength may also be partly due to the weakness of the US dollar, as soft economic data in the US has raised concerns about the possibility of a recession.

EURUSD: Bullish above 1.0100

S1 S2 R1 R2
0.9880 1.0100 1.0600


GBPUSD: Further upside above 1.1700

S1 S2 R1 R2
1.1150 1.1700 1.2320


Commodity Currencies

Aussie edged higher on strong inflation data

The Australian dollar has risen to around $0.64, approaching its highest levels in almost three weeks, in response to stronger-than-expected domestic inflation data. Annual consumer prices in Australia surged 7.3% in Q3 2022, up from 6.1% in Q2 and exceeding expectations of a 7% increase. This puts pressure on the Reserve Bank of Australia (RBA) to tighten its monetary policy more aggressively, following its decision in October to slow the pace of its interest rate hikes with a smaller-than-expected increase of 25 basis points. Despite this, analysts still expect the RBA to proceed with its plan of raising rates more frequently at smaller increments. The Australian dollar has also benefited from a decline in the value of the US dollar, as investors anticipate that the Federal Reserve will become less hawkish in the coming months.

Kiwi pared gains against the greenback on the back of a hawkish RBNZ

The value of the New Zealand dollar weakened below $0.57, following increased risk of a global recession and bets on higher US interest rates, which have led investors to seek safety in the US dollar rather than other major currencies. The New Zealand dollar had previously gained strength due to revised forecasts for higher domestic interest rates, following stronger-than-expected inflation data. In the third quarter of 2022, annual consumer prices in New Zealand increased by 7.2%, down slightly from the three-decade high of 7.3% seen in the second quarter, but still above expectations of a decrease to 6.7%. In October, the Reserve Bank of New Zealand raised its cash rate by 50 basis points, bringing the total increase to 325 basis points to 3.5%. The bank also indicated that further tightening may be necessary in the future as it works to bring down high inflation. Despite this, the New Zealand dollar has stabilized above $0.57, as traders reassess the outlook for US monetary policy and the policy direction of China, New Zealand’s top trading partner, following changes in the Chinese government. The New Zealand dollar remains supported by chief economist Paul Conway’s statement that the central bank expects “to see inflationary pressures easing going forward,” and that it is “hopeful” that inflation has peaked.

Loonie gained strength on hawkish BOC

The Canadian dollar has regained ground and is trading around $1.355 as investors react to the Bank of Canada’s (BoC) interest rate decision. The BoC surprised markets by slowing the pace of interest rate hikes, raising the key rate by 50 bps to 3.75%. This was below the expected 75 bps hike, as the economy shows signs of a sharp slowdown. The annual consumer inflation rate in Canada eased to 6.9% in September, though this was slightly above expectations, as food prices continued to accelerate. The yield on the Canadian 10-year government bond has fallen to 3.3%, after reaching a 12-year high of 3.8% on October 21, following the BoC’s rate hike.

AUDUSD: Bullish above 0.6520 

S1 S2 R1 R2
0.6180 0.6520 0.6880


NZDUSD: Bullish above 0.5700

S1 S2 R1 R2
0.5700 0.5550 0.6000


USDCAD: Bearish below 1.3550

S1 S2 R1 R2
1.3200 1.2780 1.3500 1.3880


Salzworth Asset Management