Dollar at 16 Month High After Stock Market Rebound

The US dollar is higher against most major pairs, with only the Australian and New Zealand dollars gaining against the greenback. European growth disappointed and Brexit continues to put pressure on the pound. Safe haven currencies failed to attract investors as US fundamentals remain strong ahead of the release of the biggest economic indicator in the market on Friday. US jobs are expected to have jumped 200,000 in October. The NFP report won’t bring anything new to the table on dollar strength, but the softness in global growth measures has benefited the US currency.

The Bank of Japan (BOJ) is not expected to make a substantive move when the policy rate announcement is published. Inflation is near 1 percent, which is not even close to the 2 percent lofty target, specially accounting for the rise in energy prices. BOJ Governor Haruhiko Kuroda’s press conference will be closely watched for more hawkish signals as a more stealthy approach to monetary policy tweaks is preferred.

No Halloween Surprise from the BoJ

The USD/JPY fell 0.51 percent on Tuesday. The currency pair is trading at 112.94 ahead of the Bank of Japan (BOJ) monetary policy announcement. There is little chance of a repeat of the 2014 Halloween surprise by the central bank. Back in October 31, 2014 the BoJ increased the size of its QE program, when expectations where for move near the end of the year.

The JPY might be down, but not out as its position as a safe haven could come into effect sooner rather than later. Multiple headwinds could rise up as the global stock market has found its legs for the time being.

Investors are seeking higher yields, to the benefit of emerging markets, but given the volatility present in the markets the yen’s drop will be limited awaiting a risk-off triggering event.

US fundamentals keep driving the US dollar as other major economies struggle to keep up. A strong US PCE and consumer confidence ahead of the release of US employment data keep validating the Fed’s decision to keep hiking rates despite the negative comments from the Trump administration.

Pound Falls as No Deal Brexit Fears Rise

The GBP/USD lost 0.65 percent on Tuesday. The currency pair is trading at 1.2710 a day after the UK budget failed to inspire a recovery in the currency, specially since the document is conditioned by a favorable trade deal being agreed on.

The deadline for an orderly divorce between the UK and the EU is fast approaching and neither side seems ready to compromise increasing the probabilities of a no-deal exit.

The Bank of England (BoE) will hold court hosting another super Thursday, but economic releases have been soft. The Confederation of British Industry published a disappointing realized sales index with a reading of 5 when the expectation was 27. The lowest datapoint since April hinting at the end of the World Cup boost.

The consumer confidence barometer published by Gfk is expected to come in lower than previous months highlighting the effect of cold weather on purchases.

Oil Under Pressure from Iran Sanctions and US-China Trade War

West Texas Intermediate fell 1.03 percent on Tuesday and is trading at 66.46 staying above the 66 price level after the release of the weekly API oil inventory report. Crude stocks rose 5.7 million barrels with gasoline and distillates showing a drawdown of more than 3 million barrels last week.

West Texas Intermediate graph

US sanctions against Iranian exports kick off next week providing some support for energy prices, although the major factors of late has been the lower global growth forecasts and a possible oversupply if Russia and Saudi Arabia, the de facto leaders of the production limit, increase their supply more than closing the gap left by lower exports from Iran.

Iran’s biggest customers could still find a way to purchase crude form its usual supplier despite the US sanctions. The Trump administration made it clear there would be no tolerance, but India, China and Turkey could test the resolve of the US.

If the supply disruption caused by US sanctions turns out to be smaller than forecasted, then Russia and Saudi Arabia could push market prices lower.

Investors will be looking for clues and the weekly release of US crude inventories by the Energy Information Administration (EIA) is the first stop on Wednesday at 10:30 am EDT.

Gold fell 0.24 percent on Tuesday as the US dollar continued gaining across the broad. Strong US fundamentals so far this week, and the upcoming U.S. non farm payrolls (NFP) report are lifting the greenback. Risk appetite made a comeback and the stock market found itself back in the black.

The US economy continues to outperform other major economies and the dollar is reflecting that difference.

Gold Lower but Risk Appetite Could be Short Lived

Demand for gold as a safe haven was lower this week with the metal close to a 1 percent loss so far this week. Then again geopolitics will continue to be a major factor and given that gold is now firmly back on the mind of investors when seeking refuge in times of high risk a comeback this week cannot be ruled out.

The stock market sell-off reminded investors of the value of gold as a safe haven. With upcoming mid-term elections in the US and a big meeting between the US and China in Buenos Aires at the end of the month, there will be no shortage of investment opportunities.

Market events to watch this week:

Tuesday, October 30
8:30pm AUD CPI q/q
Tentative JPY BOJ Policy Rate
Tentative JPY Monetary Policy Statement
Tentative JPY BOJ Outlook Report
Wednesday, October 31
Tentative JPY BOJ Press Conference
6:00am EUR Flash EU CPI
8:15am USD ADP Non-Farm Employment Change
8:30am CAD GDP m/m
Thursday, November 1
5:30am GBP Manufacturing PMI
8:00am GBP BOE Inflation Report
8:00am GBP MPC Official Bank Rate Votes
8:00am GBP Monetary Policy Summary
8:00am GBP Official Bank Rate
8:30am GBP BOE Gov Carney Speaks
10:00am USD ISM Manufacturing PMI
8:00pm NZD ANZ Business Confidence
8:30pm AUD Retail Sales m/m
Friday, November 2
8:30am CAD Employment Change
8:30am CAD Trade Balance
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza