The dramatic U-turn in UK fiscal policies, an easing in gas prices and improved risk sentiment have all buoyed cyclical currencies and a further corrective period in the dollar. Certainly, the mood has lifted and was sparked in part by the technical rebound immediately following last week’s hotter than expected US inflation data. But money markets are still pricing in more jumbo-sized rate hikes by the Fed at its early November meeting. The Fed’s peak or “terminal” rate is also closing in on 5% and this should underpin support for the dollar in the medium term. The DXY is under pressure on the H4 timeframe and could test the 200 SMA if 110.70 proves to be unreliable support.
UK helps buoy risk appetite, CPI eyed
The unprecedented reversal in UK government policy has seemingly calmed market ructions in UK assets that had threatened a meltdown in the normally sedate gilt market and even in pension funds. The “mini-budget” had garnered huge criticism, not only from the domestic audience but also from rare criticism by the US President and the finance experts at the IMF. With the plans consigned to the history books, markets will look to today’s top tier data in the form of UK CPI.
Expectations are for annual CPI to climb to 10.1% from 9.9% with the core metric set to rise to 6.4% from 6.3%. Economists forecast upside pressure from food prices battling with falling petrol prices, similar to the factors in the August report. Going forward, inflation is expected to remain in double digits in the next few months, even with the Government’s energy price cap. Of course, that is now only going to last six months so will be a focus in time as speculation mounts as to where energy prices and inflation go through spring time next year.
GBP/USD has been battling with a resistance zone around 1.14 which includes the pandemic low and the falling trendline from the August high. Just above here also lies the 50-day simple moving average which tallies with the October highs around 1.1490/95. Red hot inflation numbers will probably see bets on BoE rate hikes ramp up with money markets currently pricing in roughly a two-in-three chance of a 75bp rate hike. There are still around 175bps of increases by the end of the year.
JPY weakness abound
Yen weakness has been strong this week with verbal intervention doing little. We’ve seen fresh 32-year lows against USD plus multi-year lows versus the euro and pound. The BoJ’s Governor Kuroda has indicated that the FX moves are more in line with fundamentals. This may explain why we have not seen significant intervention and JPY buying yet. As we have written before, the speed of the move higher has slowed which has been a prior cause for concern, as opposed to the absolute level of the major. But long-term, unless the fundamentals start pulling in the same direction, it is tough to change the current direction of travel with a hawkish Fed and a dovish BoJ.