Month of November opened with high expectations on tighter monetary policy, as inflation concerns continued to mount. Major economies would register inflation not seen in decades, and central banks were under pressure to act. However, the recently discovered Omicron variant could rein in inflation for them, as it threatens growth across the globe.
Dollar Strengthens on Rate Hike Bet
November started with traders anticipating the Federal Reserve’s crucial decision on tapering. On Nov. 3, the Federal Open Market Committee (FOMC) reached the decision, stating that it would begin tapering. Specifically, the Fed would reduce its monthly $120 billion bond-buying programs by $15 billion.
Photo by Colton Duke on Unsplash
Most traders anticipated the decision, so it did not boost the dollar. Rather, traders saw the Fed’s decision as more dovish than expected, as Fed officials still maintained that high inflation would remain transitory. Consequently, the Fed would be less likely to raise interest rates earlier.
As a result, the dollar index dipped. The dollar would continue wavering in early November, until the release of October’s inflation numbers. A surge in consumer inflation by 6.2% sent shock waves across the economy. The Fed’s view that inflation will remain transitory became less credible, and traders started betting on earlier rate hikes. After the release of the inflation data, the dollar index jumped from 93.95 to 95.18.
Afterward, the dollar moved sideways, until the release of more economic data. In the latter half of the month, the dollar surged again on high consumer spending data and a hawkish Fed. Specifically, Fed officials seemed to confirm that the Fed could begin tapering sooner than expected.
Near the end of the month, Chairman Jerome Powell himself confirmed that the Fed officials will discuss wrapping up its bond purchasing program “a few months sooner” than expected.
Euro Slumps on Weak Growth
November for the Euro started with inflation concerns in the foreground. Traders bet that inflation would force the European Central Bank (ECB) to raise rates as soon as October 2022. However, the ECB President Christine Lagarde stated that rate hikes in 2022 were “very unlikely”. She also stressed that the ECB “must not rush into a premature tightening” that could put the recovery at risk.
Later, surging COVID cases and unfavorable economic data made traders reassess their bets about ECB’s rate hikes. In fact, in mid-November, the Euro slumped to a 16-month low against the dollar, due to a divergence in expected monetary policy. Namely, traders expected the Fed to raise rates mid-2022. On the other hand, low growth could prompt the ECB to be more dovish. However, the divergence in monetary policy was just one of the reasons for the EUR dropping.
Photo by Abdel Rahman Abu Baker from Pexels
Data from Germany showed a deterioration in business outlook, affected by growth concerns due to the rampant spread of the coronavirus. In response to the weakening Euro, the ECB stated that it intends to taper its bond purchases in March 2022. However, traders were more interested in interest rates.
Near the end of the month, traders saw a major spike in inflation. November consumer inflation was at 4.9%, the highest in 20 years. The surge beat expert estimates of 4.5% and was a significant jump from October’s 4.1%. In Germany, a country particularly averse to inflation, prices were up 6% – which is a 29-year high. What drove the price increases was mostly surging energy prices and supply chain issues.
Surging prices also changed the outlook on ECB’s monetary policy. With prices way above its 2% target, the central bank will have a difficult time justifying keeping its bond purchasing program and putting off rate hikes.
Pound sold on ‘toothless’ BoE
The pound dropped after the Bank of England (BoE) decided to keep interest rates low, while stating rates would go up soon. As the bank went back on its previous commitments, traders now questioned its credibility, calling it “toothless” on inflation.
The economy was struggling with a skill shortage and surging energy prices, which together with the major fiscal stimulus contributed to inflation fears. In fact, in mid-November, economic data showed inflation at 4.2%, which is a 10-year high for the country. The data was worse than the expected 3.9% inflation.
Photo by Robert Bye on Unsplash
The data boosted the pound. Traders now believed that inflation would force BoC’s hand, which could no longer delay expected rate hikes. Consequently, the pound jumped to a 21-month high against the euro.
However, a worsening economic outlook coupled with the discovery of the new Omicron variant put downward pressure on the pound. The pound dropped over concerns of new lockdowns, which could impact growth.
CAD drops on oil prices, despite a strong economy
After a strong performance in October, the Canadian dollar weakened in the first weeks of November. CAD dropped against the USD, the Japanese yen and even the euro.
Mid-November, economic data boosted the currency, showing signs that the country was recovering. The Canadian economy grew by 5.4% in October in the third quarter on a yearly basis, beating expectations. The October surge in manufacturing likely contributed to positive economic numbers.
Photo by Patrick Tomasso on Unsplash
However, the stronger economic performance also contributed to inflation. October inflation numbers came out at 4.7%, an 18-year high for the country. However, CAD dropped against the dollar, due to lower oil prices. Oil prices were, in turn, under pressure by a stronger dollar.
Near the end of the month, Fed Chairman Powell’s hawkish comments caused a drop in the Canadian dollar against its U.S. counterpart. These were enough to offset the strong performance of the Canadian economy. Consequently, CAD dropped to its 10-week low against USD. Moreover, news that existing vaccines might not affect the new Omicron variant caused oil, a major Canadian export, to fall in price. CAD dropped 0.4% against the dollar, to 1.2787.
Japanese Elections Open Way for Fiscal Stimulus
November opened with election results, in which the ruling Liberal Party held its strong majority, defying expectations. The new Prime Minister announced plans to spend more than $265 billion on a stimulus program, a key election promise. The package would include handouts for children up to the age of 18 and a program to promote domestic tourism. Japanese markets rebounded on the news of the victory.
Photo by Priscilla Du Preez on Unsplash
COVID fears also led to Japan sticking to its loose monetary policy. Therefore, traders expected the yen to fall to multi-year lows against the dollar. The expectations seemed to materialize as, in the second week of November, the yen lost all its monthly gains against the dollar. The drop was due to a widening between U.S. and Japanese bond yields. However, the yen soon rebounded, as bond rates across the world dropped.
Near the end of November, uncertainty related to the new Omicron variant boosted the yen, which investors see as a safe haven. However, it still dropped against the dollar.
Wrap Up
The month was especially good for the dollar, as rampant inflation and a hawkish Fed contributed to rate hike expectations. The stronger dollar led to lower oil prices, which held down the Canadian dollar. The euro suffered from slow growth and a reversal of expectations on ECB’s policy. The pound was also hit by a struggling economy and a dovish central bank. Japan stuck with its loose monetary policy, but the yen still held firm against the dollar.
