US CPI data comes into limelight, BoE sticks to its guns

  • Dollar up on PPI data, down on Fed minutes
  • Investors focus on US CPI numbers
  • The pound rebounds, but the BoE cuts its gains
  • Dollar/yen continues to rise as the yen remains powerless

Dollar quiet after some ups and downs

The US Dollar traded calmly during today’s Asian session, and although it saw some ups and downs yesterday, its overall trend and outlook has barely changed.

The greenback received a slight boost after data showed U.S. producer prices rebounded more than expected during September, with the year-over-year rate slipping less than expected. This may have sparked speculation that the headline CPI rate today could also be higher than expected.

Hours later, however, some sellers took the opportunity to jump into action after minutes from the last FOMC meeting showed that, although many officials pointed out that the cost of too much action small outweighed the cost of acting too aggressively, several others argued that it would be important to “calibrate” the pace of future hikes to mitigate the risk of “significant adverse effects” on the economy.

That said, with most officials still appearing in their hawkish suits following the rally and the latest employment figures pointing to further tightening in the labor market, investor sentiment on interest rates has hardly changed. been modified. They still assign a roughly 90% probability of another 75 basis point hike in November and still expect a terminal rate of 4.7% in March.

US inflation data will impact Fed hike bets
What might prompt investors to reconsider and adjust their Fed bets could be today’s US CPI data for September. The headline rate is expected to have declined to 8.1% YoY from 8.3%, but the base rate is expected to have increased to 6.5% from 6.3%. This would imply that the drop in the headline rate is solely due to lower food and energy prices, thus adding to the talk that inflation has become more rigid compared to a few months ago.

With PPIs also raising the risk of a headline CPI rate hike, an upside surprise could seal the deal for the Fed’s fourth consecutive triple hike, while some of those expecting lower rates towards the end of next year could change their minds.

The Dollar could extend its current uptrend, perhaps nearing or even retesting its 20-year high at 114.78. At the same time, US Treasury yields could rise further, while equities are expected to extend their decline. With all three major Wall Street indices in a bear market and hitting a new 2+ year low, it may only be a matter of time before the Dow Jones and S&P 500 don’t do the same.

The pound rebounds but the BoE slows down
The British Pound rebounded yesterday, claiming the top spot in performance among the major currencies. What encouraged book buyers to come off the bench was a Financial Times report that the BoE has privately signaled to lenders that it plans to extend its emergency bond purchases. The report came just a day after BoE Governor Bailey dismissed earlier rumors of an extension to bond buying.

The back-and-forth game did not end with the FT report, however. Shortly after, the BoE reiterated its stance that the program will end on Friday, capping sterling’s gains.

Back to square one, the outlook for the pound likely remains the same as yesterday. With traders not trusting the new UK government and fearing that the BoE’s aggressive hikes could help push the UK economy into recession, the path of least resistance for the UK currency could still be on the downside.

The main loser was the yen, which continued to fall without any sign of intervention, confirming the view that the Japanese authorities are not defending a particular level but rather monitoring the speed of the fall. However, even if another episode of intervention takes place soon, it could be doomed to fail again, as credit spreads are at the top of forex traders’ agendas today. With the BoJ stubbornly sticking to its ultra-loose strategy, the yen could be doomed to continue falling.