FX Market View #31 Dollar strengthens as central banks push back against further tightening

The Dollar held a firmer stance at the end of last week, as major central banks pushed against the markets discounting future tightening. First up in this regard was the Bank of England decision to hold rates, despite the market expecting a hike. Then there was the dovish tapering announcement from the FED, which initiated the path towards a decline in short and long term interest rates. The drop in yields contributed towards position unwinding, as the Australian and New Zealand Dollars, Sterling, and Norwegian Krone extended losses. Of the currency majors, only the Yen was able to stand up against the Dollar gains, as most currencies are weighing down on the heavy side. Emerging currencies are trading lower, with this downward trend gaining strength.
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Now that the cycle of major central bank announcements is ending, the market is looking to the economic reports that can influence the monetary picture. The pandemic is definitely not behind us, as parts of Europe are experiencing another wave. This resurgence will extend the social and economic disruptions of major economies, on an already weakened global supply chain. Therefore, market attention is focused on the upcoming economic data releases. During this week the US reports October CPI data, China releases inflation measures, and the UK details their Q3 GDP numbers. In addition to this, the release of Australian employment data for October will give a view on the strength of their economy.
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The shifting focus towards inflation data, away from rising rates and the anticipated central bank tightening favours the stronger Dollar. Following a stronger than expected US employment report, the Dollar Index posted a high of the year. Inflation data in the US and China has confirmed that the two largest world economies are pressured with rising prices. Consequently, the Dollar started the new trading week with mixed returns whilst sitting in a narrow range. The gainers from the majors are the New Zealand Dollar and Norwegian Krone, with most European counterpart struggling. As for the Euro and Yen, they remain relatively unchanged as the markets await new developments. Whether it is macro data releases or the growing infection rates, challenges are seen ahead.