At last month's FOMC meeting, Federal Reserve Chair Jay Powell concluded the press conference with a sense of frustration that inflation had not fallen more quickly. Inflation data understandably is now one of the biggest market movers of the month and today sees the US October CPI release. Headline inflation is expected to dip to 7.9% from 8.2% year-on-year, but the market's focus will be on the core rate. Here, the market will be looking at the core monthly figure - expected at 0.5% after two months at 0.6% month-on-month.
Today's release will have some bearing on what the market prices for the Fed meeting on 14 December, where a 56bp rate increase is currently priced. Today's CPI data will not be the final say on that decision (we have jobs data and another CPI release before then), but it can set the tone regarding the Fed's comfort level. Expect the dollar to trade off today's data where any upside surprise could do some damage to the recent benign risk environment and end the recent correction in the dollar.
The pullback in stocks and the broad US dollar's strength yesterday proved too much for the Canadian dollar, which succumbed to the pressure. The greenback moved back above 1.3500 and has held above there today. The pair is likely to test 1.36 and possibly higher and with today’s risk CPI risk event, expect some possible volatile moves higher should the US CPI print hotter than expected. Domestically the data calendar is light leaving the CAD to trade on broader market themes. Observe the USD/CAD trends.
EUR/USD continues to drift towards the upper end of recent ranges and US inflation data will be a key driver. Despite the recent recovery in equities, the external environment is still mixed, including lockdowns spreading across China. For today, the eurozone data calendar is light and we have a few European Central Bank speakers. The market is currently split on whether the ECB hikes 50bp or 75bp at the 15 December meeting. Today's US data is big enough to put an end to the recent EUR/USD correction - should inflation surprise on the upside.
In the overnight session the RICS house price balance data for October was released. UK estate agents now see house prices declining for the first time since the summer of 2020 - a clear response to the recent surge in mortgage rates. This will again question the market's pricing of the Bank of England's tightening cycle, where most think rates priced at 4.65% next summer are way too high. GBP saw a big intra-day sell-off yesterday. 1.1150 is a clear target for GBP/USD and doubt any gains over 1.15 will maintain.
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