Dollar up on PPI data, down on Fed minutes
Investors lock gaze on US CPI numbers
Pound rebounds, but BoE cuts gains short
Dollar/yen keeps rising as yen stays helpless
Dollar calm after some ups and downs
The US dollar traded in a quiet manner during the Asian session today, and although it had some ups and downs yesterday, its broader trend and outlook have barely changed.
The greenback received a small boost after data revealed that US producer prices rebounded by more than expected during the month of September, with the year-on-year rate sliding by less than forecast. This may have sparked speculation that the headline CPI rate today may also come in higher than estimated.
A few hours later though, some sellers took the opportunity to jump into the action after the minutes from the latest FOMC gathering showed that, although many officials emphasized that the cost of taking too little action 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.
All that said, with most officials still appearing in their hawkish suits in the aftermath of the gathering and the latest employment numbers pointing to further tightening in the labor market, the investors’ view on interest rates was barely altered. They are still assigning around a 90% probability for another 75-bps hike in November, and still expecting a terminal rate of 4.7% in March.
US inflation data to impact Fed-hike bets
What may prompt investors to reconsider and adjust their Fed bets may 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 core is forecast to have risen to 6.5% from 6.3%. This would imply that the slide in the headline rate is only due to lower food and energy prices, thereby adding to the narrative that inflation has become stickier compared to a few months ago.
With the PPIs also raising the risk of a higher headline CPI rate, an upside surprise could seal the deal for the fourth consecutive triple hike by the Fed, while some of those expecting a rate cut towards the end of next year could change their minds.
The dollar may extend its prevailing uptrend, with the dollar index perhaps getting closer, or even retesting its 20-year high of 114.78. At the same time, US Treasury yields could rise further, while equities are likely to extend their slide. With all three of Wall Street’s main indices in a bear market and the Nasdaq Composite hitting a new over 2-year low, it may be a matter of time before the Dow Jones and the S&P 500 do the same.
Pound rebounds but BoE hits the brake
The British pound rebounded yesterday, claiming first place in terms of performance among the major currencies. What encouraged pound buyers to get off the bench was a report by the Financial Times saying that the BoE has privately signaled to lenders that it is planning to extend its emergency bond purchases. This report came just a day after BoE Governor Bailey dismissed earlier rumors of a bond-buying extension.
The back-and-forth game did not end with the FT report though. Soon thereafter, the BoE reiterated its position 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's. With traders not trusting the new UK government and remaining worried that aggressive hikes by the BoE will assist in dragging the UK economy into recession, the path of least resistance for the British currency may still be to the downside.
The main loser was the yen, which continued to tumble without any sign of intervention, affirming the view that Japanese authorities are not defending a particular level but rather monitoring the speed of the slide. However, even if another intervention episode takes place soon, it may be destined to fail again as nowadays rate differentials are at the top of FX traders’ agendas. With the BoJ stubbornly sticking to its ultra-loose strategy, the yen may be doomed to keep falling.