Morning Brief – CPI passed, BOE up 

Charles Porter
Thu 11 May 2023

CPI passed, BOE up 

US inflation data released yesterday caused volatility within the US Dollar. This was most widely observed within FX spot crosses, however, a deeper look into the forward and swap markets showed more significant price upheavals. Early on in yesterday’s European session forward points on many emerging market vs. US Dollar crosses had been rising amidst soft US rate expectations. Despite the Fed’s decision last week, this trend had been gradually emerging, bringing with it demand for the carry trade amidst many falling EM FX spot valuations. However, when US inflation data hit screens yesterday, confidence behind forecasted US monetary policy was undermined and prices on swaps within Dollar crosses wavered.

The data showed the month-on-month growth in consumer price index inflation come in at 0.4% in April. The underlying data was favourable enough to mean that annualised inflation recorded below 5%. However, with the exact reading at 4.9%, it may not be time for celebration just yet. The reading was important as it continues to show inflation moving in the right direction. However, crucially for the move in the FX swap market, presented a challenge to those participants expecting rate cuts from the Fed later this year. Month on month figures would have to be considerably lower to force the Federal Reserve into conceding that they would be seeking to entertain rate cuts. The data is positive for US and indeed global inflation, marking the first sub-5% reading in two years, down from a peak of 9.1% in June last year. 

With the Dollar ultimately weakening following the inflation decision, markets appear to have steadied. This will allow attention to shift to the Bank of England today as it releases its latest monetary policy decision. This publication as well as the subsequent press conference from Governor Bailey will attract similar scrutiny to the shape of the rate curve in the UK. As we wrote yesterday, the decision itself appears to be a foregone conclusion. However, as always, the key for markets could be in the detail and even tone of the press conference to follow this afternoon.

Discussion and Analysis by Charles Porter

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