The risk-on mood that kicked off the week has slowly deteriorated, providing a reality check for currencies including those in the EM basket and GBP. Initial optimism surrounding China’s zero-covid potential policy adjustment and the passing of two key central bank risk events last week had supported currencies that have typically suffered considerable volatility as of late. It was apparent throughout yesterday’s trading session in particular that this theme may not endure the remainder of the week with a return to defensive demand across the market. As usual, Sterling suffered to the benefit of currencies including the US Dollar within this environment.
The market had been keeping an eye on the US midterm election outcomes albeit with a more keen focus on the US inflation data that will be released later today. It is clear from the declarations made so far from these elections that the potential landslide Republican victory that many pollsters had forecast has not materialised. In fact, there was a tangible liquidation of Dollar-shorts boosting USD valuations as a result of the Democrats’ performance in the congressional elections. However, as already forecasted, the flows generated to date by the midterm elections could pale into insignificance once CPI data is released.
The inflation release is scheduled for 1:30pm today. The key for this data release is that both core and headline inflation data year-on-year and month-on-month are expected to show a decline. We have been in similar territory before which had major ramifications for the FX and wider financial markets when that expectation was not upheld by data. It is logical and accurate that the peak in inflation should precede the peak in Federal Reserve monetary policy adjustment making today’s data release critical for what markets can expect from the Fed and other major central banks globally that are seemingly following its lead.
If the data this afternoon does not follow consensus forecasts and show the inflation rate coming down then you can bet on some USD strength at least in the short-run whilst markets price in further near-term Federal Reserve action and raise the peak level of the projected Fed funds rate next year. However, should the data demonstrate a decline in inflation to the extent or greater than it is already expected to, the calls for peak Fed hawkishness will grow in number and volume in so doing undermining the US Dollar’s value.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Oil Price
Humphrey Percy
Fri 2 May 2025
Oil Price Pre TT or Trump Tariffs, the oil price seesawed around but mostly reverted to its mean over a few trading sessions unless a major piece of economic, political or trade news arose. All that has gone out of the window with steady declines in session after session, so in case you have been […]
Daily Brief – Stagflation USA
Humphrey Percy
Fri 9 May 2025
Stagflation USA This is the spectre confronting Federal Reserve Chair Powell and the wider USA. It is unusual simultaneously to have both rising unemployment and higher prices with the consequence of rising inflation, but that is where the USA stands today, in the face of the TT or Trump tariffs. Unsurprisingly, despite POTUS offering his […]
Daily Brief – Asia on Fire
Humphrey Percy
Wed 7 May 2025
Asia on Fire The TWD or Taiwan Dollar has scarcely featured in most FX traders’ consciousness until the past four weeks, when the NTD has roared up over 10%. The Korean Won has managed a respectable 6%, the Thai Baht and the Malaysian Ringgit 5% and the Singapore Dollar 4%. So what’s behind it? The […]
