Hot CPI boosts the buck

USD

The dollar reasserted itself yesterday after October CPI landed hotter than expected, vindicating our call not to bet against the buck into the release. Headline prices rose 0.4% MoM against a 0.3% consensus, while core printed 0.3% for a third straight month versus 0.2% expected, leaving three-month annualised core inflation at 3.7% and supercore at 5.5%. With no annual rates published due to last year’s government shutdown, the monthly momentum is what matters, and it points to energy costs seeping into broader prices. Two-year Treasury yields jumped 17bp to 4.73%, the 10-year briefly traded above 5%, and the DXY index climbed 0.6% to finish the day around 102.2, more than retracing Monday’s slide. For the Fed, a 25bp December hike is now fully priced, though we remain sceptical on the prospect of a 50bp move, despite Governor Waller floating this option pre-CPI. Today is Veterans Day, so Treasury cash markets are closed, and the data calendar is empty, leaving the dollar to trade on geopolitics. Overnight, Brent rebounded from a two-month low after Iran’s security chief denied talks were under way and tanker attacks in the Strait of Hormuz continued, keeping haven demand alive. We expect the dollar to consolidate its gains ahead of Friday’s PPI.

EUR

EURUSD slid back below 1.12 on Tuesday, eventually stabilising in the mid-1.11s with a hot US CPI print doing the damage, and despite a chorus of hawkish ECB commentary. Bundesbank President Nagel said there was a strong case for a December hike, and that policy must move into restrictive territory, while Chief Economist Lane called a hike “prudent indeed” if the data hold up. Markets now price the odds of a 25bp hike on December 17th at roughly 90%. Still, the euro continues to struggle, and oil’s rebound overnight on renewed Hormuz tanker attacks is a reminder that the terms-of-trade channel still runs against the single currency. Today brings Cipollone, Nagel and Kazaks, plus Lagarde at the Paris Peace Forum, but with the December hike largely priced, their comments are unlikely to shift the dial. As such, we see EURUSD drifting today, albeit with a test of year-to-date lows possible if risk sentiment deteriorates further.

GBP

Sterling was the laggard among the majors yesterday, with GBPUSD dropping to the low 1.33s and EURGBP edging higher, as the dollar’s post-CPI surge compounded the pound’s sensitivity to swings in risk appetite. Domestic news did little to help. Deputy Governor Lombardelli said the conditions for persistent inflation were “crystallising” and that there was a likely case for another near-term rate rise, offering little new information, while Huw Pill’s evening remarks reiterated that there is no preset path for policy. Markets continue to price a December hike at just over 65% this morning, broadly consistent with our base case of one final move to 4.25% on December 17th followed by an extended pause. Gilts found some support from Brent’s brief dip below $90 on Tuesday, but crude’s overnight recovery after the latest tanker attacks in the Strait of Hormuz shows the UK’s energy-driven inflation problem is far from solved. There is no top-tier UK data today, so cable will track the dollar before attention turns to tomorrow’s preliminary Q3 GDP, where consensus looks for 0.7% QoQ. A softer print would reinforce our more dovish-than-market medium-term view and leave GBPUSD vulnerable to a test of 1.33 support.

CAD

The loonie struggled again yesterday, with USDCAD testing 1.42, its highest in almost four weeks and matching the level we flagged as a risk should US CPI run hot. Meanwhile, the Bank of Canada’s Summary of Deliberations offered CAD little comfort. Governing Council said it “might need to raise interest rates further” but stressed considerable uncertainty and a one-meeting-at-a-time approach, having lifted its inflation forecast to 3.5% by year-end. Against a Fed that looks set to hike by at least 25bp on December 9th, the same day as the BoC decides, the policy divergence remains firmly in the dollar’s favour, with markets pricing only a 50% chance of a follow-up Canadian move after last week’s soft jobs data. That said, crude has rebounded overnight after Iran’s denial of talks and fresh tanker attacks near Hormuz, which may offer the loonie a modest reprieve. But with Canadian bond markets closed for Remembrance Day and no data due, USDCAD is unlikely to deliver much excitement today.

Disclaimer

This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.