In the wake of two consecutive daily pullbacks, the dollar index is now in a position where it is trying to moderately rebound to the 107.00 region on the back of a tepid selling bias in the risk complex. The dollar's rebound comes in contrast with a small drop in US yields across the curve, as global equity indices continue to push higher after cooling-than-expected U.S. consumer prices lifted hopes that the Federal Reserve will slow its aggressive monetary tightening campaign. However, comments from Fed official Waller punctured this optimism, resulting in a modest recovery in the dollar index. The Federal Reserve Governor, Christopher Waller, said yesterday that the reaction to the inflation report showed that markets were "way out in front." Waller explained that the 7.7% annual CPI is still "enormous" and that the Fed still has a long way to go before it can deal with inflation. Early Monday morning, the US Dollar seemed to have been able to hold its ground because of these comments.
Market participants will pay close attention to what Fed officials have to say in the absence of macroeconomic data releases with high impact. As part of the day's agenda, US Federal Reserve Vice Chair Lael Brainard and NY Fed President John Williams are due to speak.
As the European stock market edged higher on Monday, it continued to have a positive tone that was evident in the previous week. However, gains have been limited amid caution over the strength of the region's economic recovery.
There is a strong possibility that the United States will avoid plunging into recession next year, thanks to a resilient job market. However, it is unlikely that the UK and the Eurozone will avoid recession as well.
Aside from that, it still remains to be seen whether the European Central Bank will be able to catch up with the extent of the Fed's tightening, especially given the fact that inflation in the region is continuing to rise at an alarming rate.
The EUR/USD pair rebounded toward 1.0350 in the early European hours, as the US Dollar paused its upward momentum. The US Dollar and Treasury yields were lifted early in the Asia trading session due to the warnings given by Fed Governor Waller. However, sellers are trying to put the pair on the back foot, taking the market below the 1.03 major support.
The economic calendar looks light this week. It is expected that data due later on Monday will show a 0.3% rise in industrial production in the Eurozone in September, which is significantly slower than the 1.5% rise seen in the previous month.
During Asian trading hours on Monday, GBP/USD staged a correction and declined below 1.1800 as traders took a step back and reassessed the market situation in the aftermath of last week's risk rally. There seems to be some support for the pair at 1.1750 at the moment. The technical outlook suggests that buyers will likely dominate the pair's action in the near future.
On Thursday, there will also be a lot of attention paid to the UK government's updated fiscal plan, especially after September's mini-budget was a bit of a car crash. A gaping hole in the public finances was recently revealed by UK Finance Minister Jeremy Hunt, who indicated that around £60 billion (£1=$1.1837) in tax increases and spending cuts are on the way to closing the gap.
After last week's impressive rise on Wall Street, the US Dollar might be able to hold onto its footing and limit GBPUSD's upside. Otherwise, in the event that safe-haven flows return to the markets, Wall Street's main indexes will turn south.
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