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King Dollar pauses its rebound ahead of US CPI

Risk sentiment remains unfriendly for markets. That means the dollar has been bid over the past week and has bounced smartly from its recent lows. The so-called Fed “pivot” theme has not worn well amid continued hawkish rhetoric from Fed officials. We heard from Mester overnight who noted that the biggest policy risk is that the Fed does not hike enough, and she does not expect the Fed to cut rates in 2023. All eyes now turn to tomorrow’s US inflation report in which economists expect core inflation to hit another generational peak.

Mixed but elevated US CPI data expected

Different measures in the consumer price data for September are forecast to have a mixed feel. The annual headline is seen paring back to 8.1% from 8.3% in August, while the monthly number is expected to rise 0.2% m/m from the prior 0.1%. It is a similar picture in the core with the street estimating a monthly reading of 0.5% from 0.6% previously, but the annual measure is seen picking up to 6.5%.

The data is the last piece in the puzzle for the Fed ahead of its meeting in early November. Money markets are pricing in a fourth straight 75-basis point rate rise and more is expected with the “terminal rate” for Fed funds peaking above 4.6%. This should underpin support for the greenback which is hovering just below multi-decade highs on the DXY at 114.77.

DXY

USD/JPY above intervention mark

USD/JPY has hit levels last seen in 1998 again this morning with new highs at 146.38. All eyes have been on the previous intervention level in support of the yen above 145. That unspoken “line in the sand” has clearly been breached so we may get more verbal intervention. That said, the speed of the move north has certainly slowed which has been a prior cause for concern, as opposed to the absolute level of the major. History tells us that unilateral intervention rarely works. That means unless the fundamentals start pulling in the same direction, it is tough to engineer and the current state of play is a hawkish Fed and a dovish BoJ.

It seems only a weaker dollar can change the dynamics of this pair so there will be much obvious focus on US inflation and its effects on Treasury yields. The widely watched 10-year Treasury is trading just below the hugely psychological 4% level. The key upside level in USD/JPY is now 147.67, the top from August 1998. Support below is the 21-day SMA is 144.29.

USDJPY

GBP whipsawed by BoE actions

It seems the reputation of some of the UK’s prime institutions continues to sink every day. The Bank of England is currently sending very mixed messages about its actions in the gilt market. It recently highlighted the serious risk to financial stability in the UK around pension funds. But then Governor Bailey last night told them they had three days to resolve their positions as intervention by the bank would be temporary. 

Credibility is hard won and easily lost in financial markets, and it has not been a good couple of weeks for the top UK decision makers. GBP is finding a small bid this morning on hopes of a U-turn by the Old Lady. The midway point of the recent spike low and October rebound sits at 1.0925. The Fib retracement level above (38.2%) is 1.1054. Expect sterling volatility to continue!

GBPUSD

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