Indecision reigned yesterday with US inflation numbers perceived to be lacklustre. Going into the numbers, USD was gaining but even though both the core and headline set of inflation numbers came in higher month on month (0.6% and 0.3% respectfully), we saw those gains erased towards the end of European trading. Year-on-year inflation now sits at 3.7%, with the core number at 4.3%. Trading on GBP was lacklustre as well as we can see in the table below with the currency showing minor gains and losses versus its G10 peers. EUR moves were also lacklustre ahead of today's ECB meeting.
* Daily move - against G10 rates at 7:30am, 14.09.23** Indicative rates - interbank rates at 7:30am, 14.09.23
USD demand slowed yesterday following those inflation numbers and any further weakness on the currency should be seen as an opportunity to buy USD given the outlook in the FX space that markets will likely follow growth differentials versus interest rate differentials. Today's retail sales numbers will give a taste of activity amongst the consumer.
All eyes on the ECB today with markets currently pricing in a 65% chance of a 0.25% rate hike. Inflation forecasts are likely to be raised by the ECB as per the Reuters report from yesterday and growth forecasts are likely to be reduced – which screams stagflation concerns and leads us to believe that over the longer term, whether the Bank hike or not, the EUR will struggle going into year-end. Any short-term gains on EUR should be seen as an opportunity to sell the currency.
Chart of the day
Today's ECB meeting is set to be a lively one with markets putting in a 64% chance of a 0.25% hike today. This is the highest it's been for over a month and we can see below that the market's bets on a hike today have been volatile with the start of the month suggesting an almost 0% chance of a hike. Whether the ECB hikes today or not, the key will be the press conference after and if Christine Lagarde can convince the markets that further rates are to come. If she fails to do so then any gains on the currency will be short-lived.
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