USD rips higher on hot headline CPI.

Headlines

* Fed minutes flag high rates for “some time” while risks shift

* US CPI expected to remain stubborn to the core

* Gold rises again on safe haven demand, dovish Fed signals

* Dollar falters as bond yields decline ahead of US CPI

FX: USD well and truly broke the sequence of six consecutive days of losses. The dollar rebounded sharply after the inflation data, having traded around flat before the numbers. A fourth consecutive week of initial weekly jobless claims around 200k also suggested tightness in the labour market continues. Yields rose though more Fed commentary stuck to the recent script. That being that rising long-term rates are doing “some of the work” for the Fed amid tighter financial conditions. The DXY is firmly back in the long-term ascending channel.

EUR had poked out of its descending channel over the last two days, but sellers quickly emerged. Solid resistance sits around 1.0634/39 where prices have twice reversed, plus there’s a major Fib level in this zone too. The ECB minutes highlighted growth concerns and broader differences in the Governing Council on inflation and the policy rate. But a pause looks all but certain at its meeting in a few weeks’ time.

GBP dropped below 1.23 after the US data. UK GDP was mixed but the headline mostly hit consensus estimates. Comments from Chief Economist Pill noted that inflation was still too high, and more rate hikes were a finely balanced issue. Cable is back in the middle of the bear channel.

USD/JPY pushed higher and is heading towards 150. US yields pushed north with the 10-year Treasury closely correlated to this major. We heard from a BoJ official who supports early yield curve control flexibility.

AUD suffered along with the kiwi as the worst performing majors. The aussie plunged below 0.6350, down close to 1.3% on the day. The recent cycle lows reside around 0.6285/6. USD/CAD moved up again just above recent resistance at 1.3667. Subdued oil prices and risk sentiment have dampened the loonie.

Stocks: US equities closed down for the first day in five. The benchmark S&P 500 lost 0.62% to settle at 4349. The tech-heavy Nasdaq finished 0.37% lower at 15,184. The Dow closed off 0.51% at 33,631. UAW expanded its strike to Ford’s biggest plant in Kentucky. The stocks settled down just over 2%. Third quarter US earnings get under way today with results from some of the biggest financial names. After three straight quarters of year-over-year earnings declines, expectations are for an improved earnings season. But given the unsettled outlook, forward guidance will be key.

Asian futures are pointing lower after the down day on Wall Street. APAC stocks were firmer yesterday on the back of the intraday rebound Stateside. The Hang Seng gapped above 18,000 and led advance sin the region. The Nikkei 225 broke above the 32,000 level.

Gold edged higher to $1885 before falling sharply after the CPI release. Yields rose close to 4.70% from recent lows on the 10-year US Treasury, after dipping to a near two-week bottom at 4.53%.

Data Breakdown – US CPI still sticky

US CPI for September showed the headline a tick higher than forecasts at 0.4% m/m and 3.7% y/y. The core rate, which excludes volatile food and energy costs, printed in line with estimates at 0.3% m/m and 4.1% y/y. Housing is still running relatively hot but the time lag with rents should see this slow significantly into year end.

The issue for the Fed is the super core services data which excludes shelter and energy costs and rose 0.6% m/m. This is highly connected to the job market that is still tight and feeling wage pressures.

Markets reacted to the hotter data by modestly upping their bets on the chances of another rate hike this year. This moved higher to 40% from below 30% before the release. But as credit availability tightens and borrowing costs are high, the current high yields may mean the Fed doesn’t need to raise rates again.

Chart of the Day – GBP/USD remain firmly in a bear channel

Sterling was a clear underperformer yesterday. UK GDP released early in the session largely matched expectations. August growth rose 0.2% on the month and 0.3% on a quarterly basis. There were downward revisions to July with manufacturing softer than expected while services were slightly better than forecast.

The recent upswing in cable didn’t get to challenge the topside of the descending channel. Short-term resistance was reinforced around 1.2340/50 yesterday before prices sunk after the US inflation data. The early October low sits at 1.2037. We get UK CPI and important wage figures out the middle of next week. 

(Sources: investing.com, reuters.com)