Dollar Resumes Fall, Pound Awaits CPI Data and Budget

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  • Dollar under pressure after Brainard comments
  • Pound Traders Eye Inflation and Fiscal Agenda
  • Wall Street closes in the red despite gains elsewhere

The dollar comes back under pressure
The U.S. dollar traded higher against all but two other major currencies on Monday, helped by remarks from Fed Governor Christopher Waller, who warned the Fed was not going to “soften” its fight against the coronavirus. inflation, although it might consider slowing the pace of its future rate hikes.

That said, the greenback is down again today, and that may be due to Fed Vice Chairman Lael Brainard putting more emphasis on the case for a higher rate path. slow thereafter, adding that she and her colleagues are trying to figure out how high borrowing costs might rise and how long should they stay at terminal levels in order to bring inflation under control.

Following Thursday’s weaker-than-expected CPI data, the dollar was the subject of strong selling interest, leading to significant technical breakouts in several major pairs as investors reduced their bets on future upside. from the Fed. For example, the pound/dollar broke above the downtrend line drawn from the February 23rd high, the euro/dollar emerged above the key resistance – now turned into a support zone – at 1.0095, and the dollar/loonie completed a head and shoulders formation.

For this reason, further data and rhetoric adding credence to the narrative of a less aggressive Fed could help sell more dollars. But with market participants now forecasting rate cuts of nearly two quarter points by the end of 2023, the door to a rebound should the opposite develop seems to have opened again. US PPI data for October today could prove this, as a smaller drop in these rates relative to CPI could reinforce the idea that interest rates could remain at terminal levels for much longer than currently expected. Therefore, any talk of the dollar reversal likely remains premature, and any further declines in the US dollar can still be seen as a larger downside correction.

UK inflation and budget in the spotlight
Aside from the US dollar, another currency that may come in for special attention this week could be the British pound. With the first estimate of UK GDP showing the economy contracted less than expected in the third quarter, traders may have turned their attention to the September jobs report, October inflation data, as well as the announcement of the new government’s budget.

The jobs report was released today, with the unemployment rate rising by a tenth of a percentage point and non-bonus wages accelerating somewhat. However, with inflation at 10.1% over the review period, real wages remained well into negative territory, and with Wednesday’s CPI data expected to show headline inflation continued to accelerate at 10.8%, the pain felt by UK consumers is far from gone.

At its last meeting, the Bank of England appeared to be more concerned with the hurting economy than skyrocketing inflation. Thus, even if inflation accelerated notably in October, it is unlikely that investors will significantly change their bets on the BoE’s rise, especially one day before the budget announcement. They currently see a 50bp hike as the base case scenario for the December rally and the announcement of fiscal tightening on Thursday could change that very little as it implies downside risks to the BoE’s already lackluster projections. .

This likely keeps the risk of another round of pound sales in the foreseeable future firmly on the table, but with the dollar under heavy pressure recently and general market sentiment improving, the pound/dollar is perhaps not- not be the best pair to exploit any potential weakness in the pound. . The Pound/Aussie might be a better choice, as it has a stronger correlation with general market sentiment compared to the British Pound.

European stocks gain, but Wall Street slips
European stocks ended another session in the green on Monday, lifted by strong gains from Germany’s Infineon (OTC:), which raised its long-term financial targets. That said, sentiment quickly turned around during the US session, with all three major Wall Street indices closing in the red, perhaps still feeling the heat from Fed Waller’s remarks.

Appetite improved further today in Asia and Europe, while US futures point to a higher open on Wall Street later in the day. It looks like it’s still early days to start looking at a resumption of the bearish trend in equities, as more remarks at the same frequencies as Fed Vice Chairman Brainard could provide more buying.

China’s drive to remove tough COVID-related restrictions is also helping investors add riskier assets to their portfolios, but with daily infections still rising, the case for an extension of district-level lockdowns cannot be excluded. This, combined with the market becoming more dovish about the Fed’s future course of action – giving way to hawkish surprises – likely keeps the latest stock market rally in the corrective bounce category.

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