Dollar holds near maximum since March on expectations of the Federal Reserve raising interest rates at December meeting.
The spot dollar index from Bloomberg has registered the best October since 2008, gaining 2.2%, since the probability of a rate hike before the end of the year exceeded 70% with less than 60% at the end of September.
Consumer spending rose by 3-month high in September as revenues also grew, which speaks in favor of raising the cost of borrowing.
“Improving economic activity and inflation expectations increase the chances that the Fed will continue to tighten monetary policy in December,” – admits Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.
“However, the dollar has reached new cyclical highs and will slip down in 2017, as the rate increase will be gradual”.
The dollar index from Bloomberg remained unchanged after reaching maximum from March 16th on Friday.
Inflation expectations have been reaching a maximum since July 2015, and the index of economic surprises rebounded with a 4-month low reached in October.
Bank of Japan kept monetary policy unchanged, lowering the inflation forecast for next year to 1.5% from 1.7%. The yen remained virtually unchanged against the dollar at 104.78.
“Six weeks later, after the revision of the strategy, for the Japanese central bank it is still too early to take bold new steps”, – said Sean Callow, a strategist at Westpac Banking Corp. in Sydney.
Fed completes its meeting on Wednesday and is also unlikely to make any changes in monetary policy.
“We expect that this meeting will signal the Fed to raise rates in December”, – says Daniel Katzive, head of foreign exchange strategy at BNP Paribas North American direction, adding that the markets are waiting for rates increase with 70% probability.
The Australian dollar has added 0.6% to 76.55, after the Reserve Bank of Australia left interest rates unchanged at Tuesday’s meeting.
British economy is teetering on the brink of recession
After the decision of the country to leave the EU at June referendum, many banks and research institutes predicted a recession, the first since the end of financial crisis.
Even one of the leading managers of hedge funds supporting Brexit, argued that the recession was inevitable.
However, 4 months after the referendum, the British economy exceeds expectations, adding 0.5% in the third quarter.
These results forced banks to reconsider their dire predictions, except Barclays.
Barclays held the most pessimistic mood among the largest financial institutions in relation to the economic outlook after Brexit.
In a note to clients of October 28, the British bank analysts Fabrice Montagne and Andrzej Szczepaniak continue to expect sluggish recession, in which the economy will experience a long gradual reduction.
They confirm their point of view by the fact that the mood of companies and consumers is falling.
Taking into account the prospects of a protracted recession, business and consumer sentiment does not necessarily have to fall to historic lows, it would be enough if they slip below the average by the end of 2017, – analysts say.