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Softer USD follows lower than expected US inflation

Good morning


Yesterday I had warned that weaker US data would lead to a sell-off in the US dollar. Well yesterday US CPI came out softer than expected and USD did indeed run for cover. EURUSD traded up from 1.0550 to 1.0670, GBPUSD from around 1.2300 to 1.2440. Both settled back a little but have held onto much of those gains, now 1.0635 and 1.2375 respectively, leaving GBPEUR 1.1630. US equities pushed sharply higher but fell back before the close, still ending positively though, and Asian equities have followed suit with a positive close.


This latest CPI release should be enough to convince FOMC to lift rates by just 50bps at their meeting this evening. Anything higher would be a complete surprise and while I know to avoid the word ‘never’, it really is highly unlikely. Greater risk of a smaller 25bps rise which they could easily do while adding in the ‘higher for longer’ or ‘higher peak rate’ comment which would give the market something to think about. However, 50bps remains the most likely outcome.


In terms of the statements afterwards, it is possible we get a slightly more dovish message from Powell, perhaps suggesting further slowing of the rate of increases, but I think he’ll point out there is still work to be done and its still a bit too early to tell how much more work will be needed. Of course we’ll look at the ‘dot plot’ with interest to see where some members see rates peaking and how long it may be before those rates start to drop again. A peak just over 5% is still expected.


UK inflation this morning and was generally softer than expected. GBPO traded lower initially but soon worked its way back up to pre-release levels. As with the US, it is too early to tell whether inflation is really on a downward trend, we’ll need a few more months of data to be more confident about that and we are still at very high levels, the headline of 10.7% is not something to get too excited about, but this move is at least a step in the right direction.


Elsewhere, India and China troops have clashed again in the disputed Arunachal Pradesh border area. No fatalities reported but I had thought both sides had agreed to pull back from the area, seems like this message hasn’t reached the troops on the ground.


Yesterday US scientists did indeed confirm some success in their pursuit of nuclear fusion. The process takes extraordinary energy input to work, lasers heat a tiny hydrogen filled capsule to around 100 million degrees Celsius, but they say this time they have produced more energy than was put in, a major step towards what some call the holy grail of energy production. Still a very long way to go for this to be a proper reality but as we know, where there is will, there is a way.


Congratulations to Argentina for a fairly convincing win over Croatia to reach the world cup final. Their opponent will be either Morocco or France, that will be decided in their semi-final this evening. Before the tournament began I did say we should try to find the outside that would cause a surprise. Think I mentioned Mexico as an example, I must admit I hadn’t thought of Morocco. Their fans are quite lively and should make a brilliant atmosphere at tonights match. Be interesting to see how many they squeeze in to the stadium. At their quarter final with Portugal it looked as though there were twice as many as there should have been.


While we sit and wait for the FOMC this evening, take a look at the latest GCHQ puzzle. It is designed for school children, although I’ve taken a quick look and am not sure its for everyone. Still, GCHQ say teamwork will be needed. If I fail to solve the puzzle sitting here on my own, i’ll use that as my excuse. SEAWEED is, I think, the first and most likely easiest answer….



- 10.00 EU industrial production

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 21.45 NZ GDP

- 23.50 Japan trade

- 00.00 AUS consumer inflation expectation

- 00.30 AUS employment

- 02.00 China retail sales, industrial production



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