The USD suffered its worst performing day since January 6th after inflation dropped more than expected in October supporting the notion that the Fed is now at the end of hiking interest rates. No more hikes are priced by markets with the first cut by the Fed expected in March with a total of 100 bps priced to be cut by the end of the year. Treasury yields dropped and equities rallied on the data continuing the higher seasonal risk appetite typical for November - as we highlighted in our report at the start of the month.
UK inflation also fell more than expected this morning to 4.6% (a two-year low) and core inflation fell to 5.7%, taking GBP marginally lower this morning – markets now bet on 80bps worth of rate cuts across 2024.
* Daily move - against G10 rates at 7:30am, 15.11.23
** Indicative rates - interbank rates at 7:30am, 15.11.23
The weakness on USD yesterday caused a buzz of activity on our dealing floor with limit orders executing and clients taking advantage of the 2-month highs on GBPUSD and EURUSD and using the opportunity to book forward contracts to hedge their future USD requirements. Today’s UK inflation numbers have taken GBPUSD marginally lower but nonetheless, we remain near these 2-month highs. Eurozone inflation numbers are due Friday and a similar lower-than-expected inflation number may well limit additional gains on EURUSD – so a good opportunity presents itself to at least consider hedging.
US retail sales are the focal point today which provides a gauge of how the US economy is doing. Markets are expecting a decline in sales in October and a lower-than-expected number may well add more pain for USD in the very short term. Producer price inflation is also expected to come in lower as well today.
Inflation drops more than expected in the US and UK taking the numbers closer to each respective economy's 2% target – which should keep the Fed and BoE happy in their battle with inflation. Markets now rate the probability for additional rate hikes at pretty much 0% from both central banks with the focus now firmly on rate cuts for next year – 80bps worth of cuts by BoE and 100bps worth of cuts by the Fed.
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