De-escalation in the Middle East Sends the Greenback into Correction

The U.S. Dollar is losing momentum this week as the U.S. Dollar index dropped by 0.3%. The Dollar is seen to deteriorate towards the lows of last week without any escalating risks. 

Higher-than-expected U.S. inflation data for September pushed the Dollar up last week. The Consumer Price Index (CPI) remained at 3.7% YoY missing 3.6% consensus. Inflation is slowing down less than expected on monthly basis too, as it demonstrated 0.4% MoM against 0.3% MoM expected. Core CPI, calculated without volatile food and energy prices, was recorded at 4.1% YoY and 0.3% MoM, in line with expectations. The U.S. Dollar added 0.8% on the news. 

Geopolitical tensions pushed the Greenback even higher, as investors rushed to buy gold, Swiss Franc and U.S. Treasuries. Overall, the Dollar was heavily overbought and added 0.2% on geopolitical developments last Friday. When Israel postponed its ground invasion in Gaza strip Investors were scaling back their fears with the war premium plummeting almost to zero. This does not meant that another round of escalation in the Middle East is unlikely, but the possibility of the ground operation in Gaza strip is fading over time. The more time passes the higher are chances Israel would abandon this plan amid international pressure. 

This week is the last before a blackout period for the Federal Reserve (Fed). Thus, many of the Fed officials are rushing to share their thoughts before the meeting of the regulator on November 1. Federal Reserve Bank of Philadelphia President Patrick Harker said that the Fed should not be considering more interest rates hikes this year. Five more Fed officials, including Fed’s Chair Jerome Powell, will be speaking this Thursday. From investors’ point of view, the Fed will not increase interest rates in 2023. According to FedWatch Tool a possibility of another 0.25% rates hike in November is considered at 9.9%, down from 13.2% a week before. An increase of interest rates by 0.25% by the Fed in December is suggested by 30.3% of investors compared to 25.0% last week. 

This same idea is confirmed by the capital inflows in the ETF WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), designed to post gains when the U.S. Dollar appreciates. Despite raging war in the Middle East and Ukraine, higher-than-expected inflation in the United States capital inflows were recorded at $4.2 million last week. This demonstrates investors’ disbelief in further strengthening of the Greenback.