We wrote last week about new highs for King dollar and the world’s premier reserve currency promptly rolled over with four straight days of losses. Some were even predicting a top in the greenback as a peak in the Fed funds rate was expected when it hit 4% earlier this week.
But they didn’t reckon on a scorching hot inflation print; not many did to be fair!
The benchmark consumer price index increased 0.1 percentage points for the month and 8.3% over the past year. Excluding volatile food and energy costs, CPI jumped 0.6 percentage points from July and 6.3% from the same month a year ago.
Economists had been expecting headline inflation to fall 0.1% and core to increase 0.3%. The year-on-year estimates were for 8.1% and 6.1% gains.
This spooked investors everywhere who ran to the dollar and sent stocks, growth stocks especially, and gold scurrying lower.
Odds for the Fed hiking by an even bigger 100 basis point move than the already priced 75bp rate hike at its meeting next week are now in play, with money markets giving that around a 32% chance.
The widely watched 10-year US Treasury yield climbed closer to June highs around 3.5% while the terminal Fed funds rate has risen above 4.25%. That means a total of 180 basis points of rate hikes are now priced in roughly for this year and underpins the 1% move higher in USD yesterday.
EUR/USD had struggled near 1.02 for a second day ahead of the release of the hugely anticipated CPI data.
Long-term trendline resistance from the February high once more did its job and capped any upside. The 50-day simple moving average just above 1.01 also acted as a barrier as prices dropped back below parity.
UK data dump points to more policy tightening
UK CPI released this morning eased back into single digits (9.9% year-on-year) in August.
Most economists reckon inflation hovers around 10% into winter, and not above 15% after the government’s energy cap measures. Jobs data out yesterday came in largely in line with consensus expectations and confirmed the UK jobs market remains tight. Unemployment hit multi-decade lows as workers opted out of returning to employment even as the older over-65s segment went back to work to fight against the rising cost-of-living.
But crucially for policymakers at the Bank of England, evidence that wage growth has continued to accelerate may suggest more aggressive rate hikes.
Subsidies for electricity and gas will also likely keep inflation elevated for longer. Markets have priced in a 50bp rate hike at next week’s rearranged BoE meeting. Rates are expected to rise from 1.7% now to at least 3% by year-end.
GBP/USD suffered losses of over 1% following the US CPI release, after it had tried to move above the mid-July low at 1.17601.
Prices are now back below the one-month bearish trendline. The support zone just above 1.14 looks very enticing for bears.