Morning Brief – US CPI

US CPI

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

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