Economists and market consensus are looking for US headline inflation to soften to 8.1% YoY in September from 8.3% the month prior while core inflation could revisit 6.5% YoY – its cycle high from March. A confirmation that core inflation remains elevated would corroborate the market expectations that policy rates in the US could continue to increase to reach 4.5% or higher next year.
With many Fed-related positives already priced into the USD, it would probably take evidence that US inflation hit a fresh cycle high last month to encourage a reassessment of the speed and aggressiveness of the upcoming Fed tightening and give the USD another boost. Look for the USD to continue its upward trajectory against FX. Observe the USD/CAD trends.
The Canadian dollar remains weak. The greenback spent most of the Asian session and European morning above 1.38. For the past five sessions coming into today, the US dollar has recorded higher lows. Yesterday's low was about CAD1.3760 and a close below it would be helpful for the Loonie, which still seems sensitive to the broad risk environment. Crude is trading a little firmer on the session but the loonie is likely to take its cue from the US CPI print this morning.
EUR/USD looks to be trading comfortably near 0.97. Most analysts are bullish on the dollar and expect any gains on a soft US CPI today to prove unsustainable above 0.98. Equally, a high CPI print could tip US equities over the edge and send EUR/USD back to the 0.9540 low. We have 0.92 targets for EUR/USD over the next two quarters.
Gilts had a strong rally late yesterday on news that the BoE had bought all the Gilts on offer (£2.5bn). At present, the BoE's emergency buying scheme will halt at close-of-business tomorrow, whereby the BoE is pressuring the LDI industry to raise as much cash as it needs to manage its margin exposures. The risk of a cliff edge in the Gilt market remains and we doubt many investors would want to go near the GBP. GBP/USD remains at risk of a move to the 1.08 area.