Data Threatens The Fed’s Plans, US Dollar Rises

The US dollar index or popularly called as the DXY experienced a very rapid recovery in the New York session last night. What is the cause that triggers this situation.

In fact, that was in connection with the publication of the results of the Purchasing Managers' Index survey for the United States services sector that exceeded consensus estimates.

The greenback strengthened against almost all major currencies. That is why; Dixie stepped on the level of the 105.30s again in the Asian session (6/December).

The Institute for Supply Management (ISM) reported the US Services PMI score increased from 54.4 to 56.5 in November 2022. It becomes one of the considerations owned by market participants to take some further actions.

Rate Hike Slowdown Still Faces Many Obstacles

Consumer spending, squeezed by high prices and costlier loans, is barely growing. The data signals that services sector activity which accounts for two-thirds of the Americas economy, remains resilient amid aggressive Fed rate hikes. The data also contradicts the consensus estimate pegged at 53.0.

The summary of the report reveal a more challenging situation for the “rate hike” slowdown plan just launched by the Fed. The employment component and business activity showed a marked increase.

The new order component only slightly corrected from 56.5 to 56.0. That was as did the price component from 70.7 to 70.0. In conclusion, the underlying factors for rising inflation are still firmly entrenched in the US service industry.

The ISM Services PMI data highlights the United States economy still showing some strength, despite tighter financial conditions. It was said by Priscilla Thiagamoorthy.

An analyst at BMO Capital Markets named Priscilla said, That was a good news for growth prospects, but it's not good news for the Fed seeking to dampen demand and loosen inflation.

Rate Hike Slowdown should be Started this Month

Federal reserve Chairman Jerome Powell last week just confirmed the central bank's intention to slow the pace of rate hikes. That must be started at this month's FOMC meeting.

However, Friday's NFP and Monday's PMI data sparked speculation that the intention would fail to materialize. Consequently, the US dollar exchange rate strengthened again.

He thinks that this issue of 'peak inflation, peak interest rate, dollar peak' is slowly turning into 'persistence of inflation. It was a persistence of interest rates higher over a longer period of time'. This was said by Jane Foley, a senior FX strategist at Rabobank. Analysts from the multinational banking group ING also noted the aggregate position of the USD against the G10 currency.

Some Factors are Triggering the USD Weakness

The position of dollar is currently neutral at the lowest level since August 2021. They also think the dollar's weakness may have stalled for a while.

A number of factors influenced those expectations. Those are included the possibility of the Fed being hawkish-aggressive again, the difficulty of relaxing China's Zero COVID policy, and oil and gas price turmoil.

Elsewhere, theAustralia's central bank (RBA) raised interest rates by 25 basis points to 3.1 per cent, in line with market expectations. The RBA boss accompanied the decision with a hawkish statement.

It was that overshadowed interest rate expectations going forward. The report serves as a provision for the Australian Dollar to counter the strengthening of the USD over the past two sessions.

AUD/USD was 0.5% Higher

The AUD/USD was recorded to climb around 0.5 percent to the range of 0.6730s in the middle of the Asian session (6/December). The RBA's decision this morning brought Australia's interest rate to its highest level since 2012.

Nevertheless, central bank officials are still hinting at raising interest rates further to control inflation. Inflation in Australia is too high, at 6.9% across the year to October.

It was stated by RBA Governor Philip Lowe. Global factors underlie most of this high inflation, but there is also a stronger role of domestic demand compared to the ability of the economy to meet it. Returning inflation to the target (central bank) demands a more sustainable balance between demand and supply.