EUR / USD
The German ZEW economic sentiment index declined to -61.9 for September from -55.3 the previous month which was slightly weaker than consensus forecasts and a fresh record low for the index while there was a steeper decline in the current conditions component. The Euro still edged higher ahead of the US inflation data amid hopes that the data would suggest an underlying moderation in inflation pressures with Ukraine hopes also underpinning sentiment.
US consumer prices increased 0.1% for August compared with expectations of a 0.1% decline with the year-on-year inflation rate held to 8.3% from 8.5% and above consensus forecasts of 8.1%. Food prices increased 0.8% with an annual increase of 11.4%. Energy prices dipped 5.0% on the month with an annual 23.8% increase.
Underlying prices increased 0.6% on the month and well above market expectations of a 0.3% increase with the year-on-year increase increasing to 6.3% from 5.9% and above expectations of 6.1%. There were significant increases for shelter and medical care services for the month with broad-based increases.
The increase in core inflation will be of particular concern for the Federal Reserve, especially with evidence that price increases were widespread on the month.
Fed Fund futures dipped after the release with market fully pricing in an increase in interest rates of 75 basis points at next week’s policy meeting. There was also some speculation that the Fed could opt for a 100 basis-point hike which triggered a sharp market reaction.
The dollar posted strong gains after the data, especially with markets positioned for a benign release. The Euro and commodity currencies were undermined by a slide in risk appetite with the Euro sliding to test support below the 1.0000 level amid a rout in equities.
The Euro dipped to lows near 0.9950 and was held below 1.0000 on Wednesday with markets monitoring any unofficial Fed briefings very closely during the day.
Treasuries dipped sharply after the US inflation data with fears over more aggressive Fed tightening and a prolonged period of restrictive monetary policies to bring inflation down, especially as it is liable to be more difficult to curb services-sector inflation.
The 10-year yield increased to 3-month highs above 3.40% which underpinned the dollar and the yen failed to gain any support from a slide in equity markets. In this environment, the dollar initially surged to above 144.00 and extended the advance to highs above 144.50.
The Fed remains in a blackout period ahead of next week’s policy meeting, but markets will be on alert for any unofficial briefings in the media.
Japanese core machinery orders increased 5.3% for July compared with expectations of a small decline. There was stronger verbal intervention from Japan’s Finance Minister Suzuki with comments that some speculative moves were behind the recent forex moves. He added that recent moves are clearly sharp and one-sided.
The warnings had some impact in curbing yen selling and after peaking just below 145.00, the dollar dipped to lows near 143.50 before stabilising.
Sterling held a firm tone after the UK labour-market data with expectations that evidence of a tight labour market would lead to a more aggressive monetary tightening by the Bank of England. Consensus forecasts are that the central bank will raise rates by a further 50 basis points to 2.25%.
Sterling consolidated above 1.1700 ahead of the US inflation data, but then declined very sharply on the release. The dollar posted strong gains and damage to the UK currency was compounded by the slide in risk appetite as equity markets posted heavy losses.
Sterling declined rapidly to lows below 1.1500 against the dollar later in the New York session while the Euro posted a net gain to around 0.8680.
The headline UK inflation rate declined to 9.9% for August from 10.1% the previous month and below expectations of 10.2% while the core rate edged higher to 6.3% from 6.2%. Immediate reaction was muted with Sterling still hampered by vulnerable risk conditions as it traded close to 1.1500 against the dollar.
The Swiss franc posted fresh gains on Tuesday, primarily in response to a fresh slide in risk appetite following the latest US inflation data. The Euro dipped to test the 0.9600 level with Italian political concerns also having some impact. The stronger dollar strengthened to highs around 0.9630 amid wider gains and a sharp increase in US yields before correcting slightly as the franc secured wider support.
Risk appetite remained brittle on Wednesday with the dollar trading just above the 0.9600 level with markets monitoring risk conditions closely.