Rate Hike Expectations Boost the Euro and the Dollar

On 31st August, the greenback was bigger and more powerful than expected U.S. economic reports and aggressive Federal Reserve remarks indicated increased interest rates, but rate-hike expectations in Europe also showed the currency union hanging on above par.

Markets are valuing a better-than-even possibility of a 75 basis point (bps) rate increase next week due to German inflation reaching its top level in almost 50 years and a rising chorus of European Central Bank officials asking for significant rate increases.

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The Euros EUR=EBS increased by 0.16% to $1.0032 in the Asian session, marking the 3rd straight session of gains, even though it is still about 2% lower for the month. At 9:00 GMT, Eurozone inflation numbers are expected.

The situation isn’t much better in Europe, and this aggressive language from ECB speakers is the sole thing keeping the Euro kind of close to parity.

The German inflation data is laying the groundwork for predictions of a good result for the Eurozone later today.

The U.S. dollar index =USD, which compares the dollar’s value to a basket of other currencies, was clinging around a 2-decade bottom of 108.64 on Monday. It has increased by roughly 2.7% this month and is on pace to post gains for a 3rd consecutive month.

Sterling GBP=D3 increased 0.21% to $1.1679 in the meantime, following overnight falling to a new 2-1/2-year low of $1.1622. JPY=EBS, which was in decline, was steady at 138.61 per dollar. According to figures released by China on Wednesday, factory output in the 2nd-largest economy in the world shrank once further in August as new COVID illnesses, the very worst heat waves in decades, and a problem in the real estate market weighed on production.

Despite being battered by a high U.S. dollar overnight, commodity currencies like the Australian dollar were not particularly affected by the disappointing China statistics. The Australian dollar (AUD=D3) increased by 0.31% to $0.68755 despite falling by 0.7% overnight.

The New Zealand dollar NZD=D3 increased by 0.19% to $0.6140 after falling by 0.43% overnight.

The offshore Chinese yuan was also under pressure, trading at 6.9029 to the dollar CNH=EBS.

The U.S. nonfarm payrolls figures are due on Friday, while the strong job openings data posted overnight may have hinted at a solid showing at the end of the week, supporting a more assertive rate rise strategy.