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Tight ranges prevailed ahead of Thursday’s New York open with caution inevitably prevailing ahead of the latest US inflation data. There was, however, hawkish ECB rhetoric with council member Schnabel stating that there is no time for monetary policy to pause with policy needing to move into restrictive territory.

US consumer prices increased 0.4% for October compared with consensus forecasts of a 0.6% increase with a larger than expected decline in the year-on-year rate to a 9-month low of 7.7% from 8.2% and compared with market expectations of 8.0%.

Food prices increased 0.6% on the month for a 10.9% annual increase while energy prices increased 1.8% on the month although with a sharp decline in gas prices.

Core prices increased 0.3% on the month with the annual rate slowing to 6.3% from 6.6% and below expectations of 6.5%. Used-car prices declined 2.4% on the month and apparel prices also declined, but there was a further 0.8% increase in shelter prices as rents continued to increase sharply.

Following the data, there was a sharp adjustment in Fed Funds futures with markets pricing in just over an 80% chance that the Fed Funds rate would be increased by 50 basis points at the December meeting rather than 75 basis points and peak expectations edged lower. The dollar posted sharp losses on the shift in rate expectations while the surge in equity markets also undermined potential US currency demand with very substantial gains for commodity currencies.

In this environment, the Euro immediately jumped higher to above the 1.0100 level and continued to surge to towards the European close. The dollar remained firmly on the defensive and the Euro continued to post gains with 12-week highs around 1.0220 in early Europe on Friday and the dollar index overall at 2-month lows.

JPY

US initial jobless claims increased to 225,000 in the latest week from 218,000 and slightly above consensus forecasts of 220,000 while continuing claims were unchanged at 1.49mn. US Treasuries posted strong gains after the US inflation data with the 2-year yield sliding to below 4.30% from 4.60% while the 10-year yield also retreated sharply to below 3.85% from close to 4.10%.

The slide in yields triggered sharp dollar losses and there was also evidence of heavy stop-loss selling. In this context, the yen posted gains against the Euro despite notable strength in equities and the dollar slumped over 5 big figures from highs with a slide to around 141.50 against the Japanese currency. 

Philadelphia Fed President Harker stated that the central bank can slow the pace of rate hikes in coming months. In subsequent comments he added that he favours a pause at the 4.50% level which is notably lower than the market pricing.

Dallas head Logan stated that the CPI data is a welcome relief, but there is still a long way to go. She did, however, add that it may soon be appropriate to slow the pace of rate hikes which fed into the overall market narrative after the data that the Fed will be more cautious.

Other Fed members also indicated that rate hikes were liable to slow and the dollar registered a further sharp retreat to 6-week lows near 140.20 late in New York.

Volatility eased slightly on Friday with the dollar settling around 141.65 as the yen lost some ground on crosses as risk appetite strengthened.

GBP

Sterling was little changed ahead of Thursday’s New York open with a slight recovery from early lows as it edged towards 1.1400 against the dollar. Volatility inevitably surged after the US inflation data with substantial gains for the UK currency. Sterling drew direct support from a weaker dollar and also gained important support from much stronger risk conditions. It initially jumped higher and surged to 8-week highs around 1.1680 around the European close. The Euro also posted sharp losses to lows at 0.8650 before a recovery to 0.8720. The surge on Wall Street continued to underpin Sterling with 8-week highs around 1.1725 against the dollar.

UK GDP declined a sharp 0.6% decline for September, but the third-quarter contraction was held to 0.2% compared with expectations of a 0.5% slide. There will still be important reservations over the UK outlook with the government announcing fiscal tightening next week. Sterling managed to hold around 1.1700 against the dollar.

CHF

The Swiss franc posted net gains on Thursday with a decline in US and Euro-Zone bond yields providing support for the currency. The Euro was unable to make headway on the day and settled around 0.9840 while the dollar declined very sharply to lows below 0.9650. The US Treasury again warned Switzerland over currency policies while National Bank member Maechler stated that further rate hikes are not out of the question with the dollar below 0.9650 on Friday.

Technical Levels 

111122 Tech

Calendar 

111122 Cal

Contents

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