Monthly Currency Outlook October 2021

Monthly Currency Outlook October 2021

Although growth forecasts have decreased, inflation expectations have risen. Price pressures are being driven by supply chain disruptions and increasing commodity prices. We may anticipate further monetary tightening from central banks throughout the globe due to these growing inflation pressures.

EUR/USD

In October, the Euro rate received little support from the European Central Bank's (ECB) monetary policy choices. It fought to compete with a Dollar that has gained from the expectation of a more hawkish Federal Reserve (Fed).

On Thursday, the euro sought to break free from the 1.16 handle as the dollar dropped sharply in the aftermath of a weaker-than-expected third-quarter GDP data from the United States, which was released around the same time as the European Central Bank's monthly press conference.

In her opening remarks, ECB President Christine Lagarde noted that recent Eurozone inflation rises would last longer than the bank had expected, albeit renewed worries about the medium-term outlook immediately followed this recognition. 

Oil prices have risen to their highest level since 2014, have harmed euro demand, with investors anticipating increasing energy costs as a possible major hit to business profitability and consumer spending power.   

The biggest political problems this month were the energy crisis and a fresh Polish conflict with EU institutions. The EUR/USD pair has plunged to a new weekly low at 1.1600, as signs of a worsening economic outlook in Europe's biggest economy have reminded investors of the shared currency's weakness. 

Germany's Bundesbank said that full-year economic growth is now anticipated to be "substantially below" the June prediction of 3.7 percent in its monthly report. 

The German central bank also predicted that economic activity would decrease in the fourth quarter due to ongoing supply chain concerns and a lack of impetus in the service sector. Furthermore, the IFO poll revealed that the German business mood continued to decline in October.

GBP/USD

The pound fell on Wednesday as GBP investors reacted negatively to the UK government's Autumn Budget.  GBP/EUR is up to €1.1859, while GBP/USD is up to $1.3756 so far this morning. The GBP/CAD rate has risen to C$1.7010, while the GBP/AUD and GBP/NZD rates have remained unchanged at AU $1.8291 and NZ$1.9150, respectively.

Following Thursday's comeback, the GBP/USD has lost its positive impetus. The United Kingdom is apparently prepared for the consequences of invoking Article 16. Unless the dollar continues under selling pressure, the upward potential of the GBP/USD remains restricted.

France detained a British fishing vessel in the continuing post-Brexit fishing rights battle and penalised another late Thursday. Referring to the recent incident, French Agriculture Minister Julien Denormandie informed France 2 TV on Friday that negotiations with the UK had made little progress. 

Meanwhile, various news sites stated that the United Kingdom is prepared for the consequences of invoking Article 16 and terminating the Northern Ireland Protocol. Considering the  European Court of Justice's participation in trade tensions in Northern Ireland, the EU, and the UK are still at odds.

NZD/USD

NZD soared on Thursday after the government announced a ten-year peak in consumer inflation. This sparked an early gain, but sellers quickly entered since the news was presumably priced in during the currency's current sixteen-session surge. 

On Friday, the New Zealand Dollar fell versus the US Dollar, as investors eased off on the upside after the previous session's climb to its top-level since June 8. 

The Reserve Bank of New Zealand (RBNZ) raised interest rates earlier this month. It hinted at further tightening to come as it seeks to maintain inflation in the 1-3 percent target range while also cooling a hot property market. Bullish traders have been relying on additional rate rises from the RBNZ, but third-quarter CPI data is likely to cement a more aggressive rising cycle.

USD/JPY

From a seasonality standpoint, October is a particularly bullish month for USD/JPY. It has been the third-best month of the year for the pair during the last five years, averaging a gain of +0.59 percent. 

This October, the yen had a nightmare month, losing 2% versus the euro and 2% against the US dollar, 4% against the British pound, and 5% against the Australian dollar. 

Global interest in the Japanese currency and its safe-haven character was reduced by the rising bond rates gap between Japan and some of its peers and increasing commodities and stock prices.  The Japanese yen hit a three-year low versus the dollar (114) and came close to matching this gain against the euro (133).

XAU/USD

Figures from the Labor Department revealed that the US economy expanded at a slower rate in the third quarter, but first applications for state unemployment benefits fell to their lowest level since mid-March 2020. 

The dollar index was up 0.2 percent, but it was on the verge of falling for the third week in a row. With inflation continuing to rise, investors perceive precious metals as appealing investments at present levels, comments  Vincent Tie, sales manager at Singapore dealer Silver Bullion. 

Gold dipped on Friday, weighed down by a stronger dollar and higher US government rates, as investors waited for further information on the Federal Reserve's reduction of economic assistance at its meeting next week.  

By 1230 GMT, spot gold had dropped 0.8 percent to $1,785.20 per ounce. 

On the one hand, gold should benefit from solid inflation expectations. Still, it's being held back by the possibility of interest rate rises in the near or distant future," according to Commerzbank analyst Daniel Briesemann. While gold is seen as an inflation hedge, decreased stimulus and interest rate rises tend to drive up government bond rates and the currency, reducing the attraction of non-yielding gold.

To Conclude

October was a month full of ups and downs in the currency market. For instance, market volatility in the United States plummeted to its lowest level since February 2020, while major indexes set fresh highs. However, underlying Pound sentiment is expected to remain cautious due to concerns about the UK future and predictions that global central banks would tighten their policies in the coming months.

EUR lost territory versus commodity-linked currencies such as the AUD and CAD and against the GBP and CHF. Nonetheless, the currency stayed close to its all-time low versus the US dollar.

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