From minutes to CPI
If you are finding it harder than usual to digest the current financial climate then you are forgiven entirely. Almost intraday, sentiment is flipping between adjectives such as inflationary, deflationary, stagflationary, expansionary and contractionary to describe the same economic phenomena. That is largely being driven by a rapidly changing macro environment accompanied by data shocks. Volatility within FX and other assets classes has moved back above many longer-term averages as prices and sentiment oscillate.
The fundamentals that drive this volatility, implied or realised, seem set to remain. Despite this, over the past week buyers of volatility have entered the market dragging implied volatility levels lower at the margins. However, such demand could erode very quickly given the macro backdrop and economic calendar. Overnight, the Federal Reserve minutes have added to the correction higher in the Dollar. The minutes of the Fed’s September meeting that saw them produce an outsized 50 basis-point rate cut showed a more divided Federal Reserve than many might have imagined. The fact many FOMC voices were calling for a 25 basis-point cut at this meeting will serve to continue to support the Dollar into today’s CPI print.
As short-term yields have pushed higher once again in the US, the prospect for more aggressive monetary easing actions is fading. Today’s CPI print will be critical to the outcome of the Fed’s November policy decision. Today’s data will also be used to determine whether EURUSD remains stuck below 1.10 ahead of next week’s ECB decision or whether a correction higher may be plausible.
Discussion and Analysis by Charles Porter
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