FX Market Update: US Dollar Index Surge Gains Steam

British pound crashes ahead of inflation data

The GBP/USD pair crashed to its lowest level since May 15 as the US dollar index soared, and as traders waited for the upcoming UK economic data. It tumbled to a low of 1.2600, much lower than this year’s high of 1.3430.

The pair will be in focus this week as the UK releases two important economic data: inflation and retail sales.

The Office of National Statistics (ONS) will release the October inflation data on Wednesday and the retail sales numbers on Friday. Economists expect the data to show that the headline Consumer Price Index (CPI) rose from 1.7% in September to 2.2% last month. Core inflation is expected to move from 3.2% to 3.1%.

The retail sales numbers are expected to come out lower than in the previous months. These economic numbers will help the Bank of England when making its next decision in December.

The bank has been more cautious, insisting that it will deliver rate cuts more gradually in the next meetings. Analysts see a few more cuts in 2025 in its bid to stimulate the economy.

The US dollar index surge continues

The US dollar index continued its strong rally, moving to the important resistance level at $107 for the first time this year. It has soared by almost 7% from its lowest level this year even as the Federal Reserve slashed rates.

The dollar has jumped for several reasons. First, the American economy is doing well, helped by strong consumer spending. Data released last week showed that retail sales rose by 0.4% in October, higher than the expected 0.3%. Inflation has also neared the 2% target.

Second, the US dollar index has soared as the Federal Reserve signaled that it may embrace a more gradual phase of interest rate cuts.

Third, and most importantly, it has rallied as investors have embraced a risk-off sentiment after Donald Trump won the election. He has pledged to introduce several policies that could impact the economy, and slow the pace of rate cuts.

For example, his plan to deport millions of illegals will likely lead to more labor shortages and inflation. The same is true with his plan to levy tariffs on most products.

Euro sell-off accelerates

The EUR/USD exchange rate continued its strong sell-off, reaching a low of 1.0497, its lowest level since October last year.

This sell-off accelerated because of the strong US dollar following Trump’s election. In his campaign, he vowed to be tougher on Europe by even hiking tariffs for goods made in the region. He has accused the bloc of being unfair to the US, which explains its trade surplus.

The euro has also dropped because the European Central Bank (ECB) has been more dovish than the Fed. It has already slashed interest rates three times this year, and analysts see more cuts coming soon. In a note, analysts at ING noted that:

The divergence between EUR and US rates continues. While the European Central Bank’s endpoint is being recalibrated lower, a more hawkish interpretation of Fed Chair Jerome Powell’s comments pushed US rates higher again, with the market now starting to lean towards seeing the Fed pause in December.

ING

Turkish lira hits all-time low ahead of CBT

The Turkish lira crashed to its all-time low ahead of the upcoming interest rate decision by the country’s central bank. The USD/TRY exchange rate soared to a record high of 34.72, higher than 30, where it started the year at.

This retreat happened after a report showed that the decline in inflation continued, but at a slower pace. According to the statistics agency, the headline Consumer Price Index (CPI) retreated from 49.38% in September to 48.58% in October. That decline was smaller than the median estimate of 48.20%.

Turkish inflation dropped from 51.97% in August to 49.38% in September, also higher than the expected 48.30%.

Economists expect the central bank to leave interest rates at 50%, where they have been stuck at this year. The bank will also likely hint at the status quo of rates remaining unchanged in the next few months. Analysts expect the bank to cut interest rates in 2025.

Indonesian rupiah crashes ahead of interest rate decision

The Indonesian rupiah continued its strong sell-off against the US dollar as traders waited for this week’s interest rate decision.

Recent data have been supportive of interest rate cuts this year. Data released earlier this month revealed that the headline consumer inflation dropped from 1.84% in September to 1.71% in October. It has been in a strong downward trend after rising to 5.7% in 2022.

The Indonesian central bank has held rates steady at 6.0% in the past two consecutive months. It has delivered only one cut this year. Another cut will be necessary since the country’s economy is slowing.