US Interest Rates and the Dollar Set for a Sharp Rebound! Is the Dollar's Strength Temporary Despite Strong US CPI, and Will the Uptrend Since Early September Continue?
In the US dollar/yen market, despite the US Consumer Price Index (CPI) exceeding market expectations, the rising US interest rates and the dollar are experiencing a pullback.
Generally, when the inflation rate exceeds market expectations, it pushes back expectations for interest rate cuts by the Federal Reserve (FRB) and, in some cases, raises expectations for additional rate hikes. As a result, US Treasury yields tend to rise, which easily leads to dollar buying.
In fact, the US September CPI released on October 14 exceeded market expectations, and the dollar strengthened immediately after the announcement. However, US Treasury yields subsequently fell, and the dollar also pulled back from its highs.
Why did the dollar’s strength not continue despite the announcement of strong inflation indicators? Also, will the dollar’s uptrend, which has continued since early September, regain momentum from here?
In this article, we will explain the outlook for the future dollar-yen market while focusing on the results of the US CPI and the sharp pullback in US interest rates.
US September CPI Exceeds Market Expectations
The US September Consumer Price Index (CPI) released on October 14 showed that inflationary pressure remains strong.
According to the US Bureau of Labor Statistics, the headline CPI rose 0.6% month-on-month and 3.7% year-on-year. The year-on-year growth rate accelerated from 3.4% in August, exceeding the market expectation of 3.6%.
Additionally, the core CPI, which excludes food and energy, also rose 0.3% month-on-month. It was 2.6% year-on-year, which also exceeded market expectations.
The movement of energy prices has had a significant impact on this price increase. Gasoline prices rose 9.1% month-on-month in September, accounting for more than half of the monthly increase in the headline CPI.
It can be seen that the rise in crude oil prices is spreading to consumer prices.
Strong CPI Should Have Been a Factor for Dollar Buying
With the CPI exceeding expectations, the market’s view that the Fed will maintain high interest rates for a long period has strengthened. Furthermore, speculation about an additional rate hike in October emerged, and US Treasury yields rose immediately after the announcement. The dollar was also bought.
For the dollar-yen, the rise in US interest rates is also a factor that supports the dollar.
However, what is important is not just the results of economic indicators. The direction of the market changes depending on how investors make decisions and trade US Treasuries and currencies afterward.
In this market, although the dollar strengthened once due to the strong CPI, that trend did not last long.
Reasons for the Sharp Pullback in US Interest Rates and the Dollar
What we want to focus on in this market is that after the strong CPI was announced, US Treasury yields and the dollar pulled back.
Usually, when the inflation rate is high, monetary tightening by the Fed is anticipated, and US interest rates tend to rise. However, this time, it is thought that not only the reaction to price indicators but also the decline in the stock market and investors’ risk-averse stance affected the market.
Capital Inflow into US Treasuries Pushes Down Interest Rates
When US stocks fall significantly or anxiety spreads regarding the future of financial markets, investors may purchase US Treasury bonds to mitigate risk.
There is a relationship where bond prices rise when they are bought, causing yields to fall.
In this instance as well, US interest rates rose immediately after the inflation data was released, but yields subsequently fell due to factors such as US Treasury buying driven by market anxiety.
If US interest rates fall, the appeal of holding dollars weakens relatively, which could lead to dollar selling.
In other words, just because a strong CPI is released does not necessarily mean that US interest rates will continue to rise in one direction.
Changes in Expectations for Additional Fed Rate Hikes
Another point is the remarks made by Fed officials.
Even if the inflation rate remains high, it does not necessarily mean the Fed will immediately move toward additional rate hikes. When judging monetary policy, factors such as employment conditions, economic growth, and the impact on financial markets are considered in addition to prices.
In the market on October 15, the cautious stance of Fed officials was also noted, and market expectations for an October rate hike receded.
The structure is that while the dollar was bought immediately after the CPI release due to awareness of additional rate hikes, the momentum of the dollar’s rise weakened thereafter along with the pullback in interest rates.
Will Earnings of Major US Financial Institutions Also Affect Market Sentiment?
In the US market, the earnings of financial institutions are also a focus of attention.
Major financial institutions are influenced by a wide range of factors, including interest rate levels, bond market movements, corporate financing, and stock market trading. If earnings fall short of market expectations or cautious outlooks for the future are presented, investor sentiment may deteriorate.
When the stock market becomes unstable during a phase where vigilance against reignited inflation is intensifying, as it is now, investors begin to look not only at interest rate forecasts but also at corporate earnings and risks across the entire financial market.
Even if the possibility of additional rate hikes increases, if concerns spread that this will worsen the stock market or corporate financing environments, it is possible that US Treasury bonds will be bought and interest rates will fall.
However, the evaluation of earnings varies by financial institution. It is important not to jump to conclusions about the direction of the dollar-yen based solely on the earnings of individual companies, but to check the reactions of stock indices and US Treasury yields together.
Will the Dollar-High Trend Since Early September Continue?
What is concerning here is the future of the dollar-high trend that has continued since early September.
After this CPI release, the dollar rose temporarily but then pulled back from its highs. However, it would be premature to judge that the dollar-high trend has completely ended based on this movement alone.
The dollar exchange rate fluctuates based on forecasts for US monetary policy, interest rate differentials with other countries, and the flow of investor funds. Even if a short-term pullback occurs, if US interest rate levels remain relatively high and factors supporting dollar purchases remain, there is a possibility that it will rise again.
Scenario where dollar strength resumes
If US inflation continues to rise and expectations for additional rate hikes by the Fed or the maintenance of high interest rates strengthen again, we may see a development where US interest rates rise and the dollar is bought back.
In particular, if the persistence of inflation is confirmed in the next economic indicators, this dollar pullback could be perceived as a temporary adjustment.
Regarding the dollar-yen, if US interest rates rise again and the situation where there are few factors to buy the yen continues, it is possible that the upward trend will be regained.
Scenario where dollar weakness continues
On the other hand, if US interest rates continue to fall and the Fed maintains a cautious stance on additional rate hikes, dollar selling may continue.
Also, if US stocks fall or financial markets become more unstable, the movement to buy US Treasury bonds as a safe asset may strengthen, and yields may fall further.
In that case, the dollar-high trend that has continued since early September may enter an adjustment phase, and the dollar-yen may also face heavy upside pressure.
What is important is to determine whether this pullback is due to short-term profit-taking or the result of a change in the market’s interest rate outlook itself.
Points to watch in the future dollar-yen market
To judge the future of the dollar-yen, I would like to confirm the following three points.
1. Will US Treasury yields rise again?
Pay attention not only to the US 10-year Treasury yield but also to the US 2-year Treasury yield, which is sensitive to the Fed’s policy outlook.
If US interest rates rebound, dollar buying may strengthen again. On the other hand, if yields continue to fall, the dollar-yen’s upside may become heavy.
2. Confirm the strength of inflation with the next US economic indicators
Although this CPI result was strong, future monetary policy will not be decided by a single indicator.
The next Producer Price Index (PPI), retail sales, and employment-related indicators are also important. If inflation continues while consumption and employment weaken, the Fed’s decision will become complicated.
Let’s check the difference between the results for each indicator and market expectations, and see how the interest rate outlook changes.
3. Confirm the trend on the dollar-yen daily chart
To avoid being swayed by short-term price movements, it is also effective to check for higher highs and higher lows on the daily chart.
If the dollar pulls back but maintains its previous lows and goes on to set new highs again, there is a possibility that the uptrend is continuing.
Conversely, if it clearly falls below recent lows and subsequent rallies fail to reach previous highs, caution regarding a trend reversal will be necessary.
Since the dollar-yen exchange rate is influenced not only by US interest rates but also by the Bank of Japan’s monetary policy and government warnings against yen depreciation, it is important to check factors from both Japan and the US.
Summary
The US September CPI exceeded market expectations, with the headline CPI rising 3.7% year-on-year and the core CPI rising 2.6% year-on-year. Immediately after the announcement, US interest rates rose due to concerns about reignited inflation, leading to dollar buying.
However, subsequently, US Treasury yields declined and expectations for additional rate hikes by the Fed receded, causing the dollar to pull back from its highs.
Just because a strong CPI is announced does not necessarily mean that the dollar’s strength will continue. Multiple factors, such as stock market trends, capital inflows into US Treasuries, and statements from Fed officials, influence the foreign exchange market.
It is also too early to conclude that the dollar uptrend that has continued since early September has ended based solely on this pullback. While there is a possibility that dollar strength will resume if US interest rates rise again, it is also conceivable that a correction toward a weaker dollar will progress if interest rates continue to fall.
Moving forward, I would like to assess the market trend while checking the direction of US 2-year and 10-year Treasury yields, upcoming US economic indicators, and the daily chart for the dollar-yen.
It is important for future analysis of the dollar-yen market to prioritize the market’s reaction after the announcement rather than judging solely based on the strong US CPI data.
Since the foreign exchange market can sometimes move in ways contrary to expectations, let’s prepare for both upward and downward scenarios and maintain thorough risk management.