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US CPI sends USD higher

Good morning

I warned yesterday that a significant shift either side of the expected US CPI headline number could lead to a bout of volatility. As it turned out, it took just a ‘mere’ 0.1% to send the US dollar marching higher. The headline had been expected to drop to 3.6% from 3.7%, but it actually came out at 3.7%. The core number came in at 4.1% as expected, down from 4.3%.

GBPUSD moved from 1.2320 to 1.2250 quickly while EURUSD went from 1.0625 to 1.0585 in just a few minutes. As the market digested the information through the afternoon the USD buying continued, taking GBPUSD to a low around 1.2170 and EURUSD to 1.0525. Both pairs did test a bit higher overnight before heading lower again although as I type they have both moved back above those overnight highs, now 1.2220 and 1.0555.

The Fed will be disappointed with CPI after the recent comments from some officials that their job in fighting inflation was pretty much done. Now the notion of further US rate rises remains a constant threat, and even if we don’t see rate increases, surely the timing of any rate cuts is getting pushed back further. Indeed perhaps the bigger issue now is not so much how high rates should be, but how long they should be high for. ‘Higher for longer’ is all well and good but is pretty vague. Incoming data will be the key.

USD also rose against JPY yesterday with USDJPY trading up to 149.80, the threat of further intervention by Japan seems to be capping the upside for the time being, now 149.65 as I type.

China trade numbers were released overnight, the surplus grew from $68bn last month to almost $78bn. China are reported to have boosted their stake in the four big state owned banks, potentially to boost confidence in the local markets and perhaps even to allow intervention in the stock markets if need be.

Meanwhile the IMF have said the impact of the Hamas attacks on Israel cannot yet be determined but a dark cloud is looming. They also warn that governments are running out of fiscal firepower to fight crises, while higher interest rates for a long period of time could trigger more market turmoil.

After the Hamas attacks, some analysts are warning that North Korea could try similar tactics in a surprise attack on South Korea. Quite why they would want to be this is beyond me but then again so much of what goes on in the world is beyond me. I wonder though if the idea is that with battles raging in Ukraine and Gaza, military resources are thin on the ground. South Korea have been boosting their defences just in case. USDKRW now around 1350, near the top of the recent range, 1362 looks like an area to watch, having capped the upside earlier this month as it did back in Nov 2022, after the pair had fallen from its multi-year highs around 1440.

Israel has warned citizens of Gaza they should leave the north and go to the south ahead of a likely military ground operation. This is easier said than done, with over one million Palestinians potentially having to evacuate. The world is now watching Israel closely, urging them to abide by international laws in any military action.

New Zealand elections over the weekend, I’m no expert on Kiwi politics but it does seem as though the current labour party will struggle to hold onto power. For the record, NZDUSD is currently at 0.5920, GBPNZD is 2.0625.

With so much in the way of geopolitical risks and global tensions the markets are nervous and I wouldn’t be surprised to see safe-haven USD buying if there are is any hint of an escalation in any of the many high-risk regions we have in the world today.

It’s all been a bit gloomy this week which isn’t really a surprise given what is going on in the world right now. The weather is miserable as well, I’ve got a leaking roof and a blocked drain so its not a lot of fun although I can’t really complain given what others are going through around the world. In brighter news we can look forward to plenty of sporting action over the weekend, Englands football team play Australia in a friendly this evening, India take on Pakistan in the world cup cricket tomorrow, England play Afghanistan on Sunday.

The Rugby world cup quarter finals take place over the weekend, England will be hoping for a better performance in their match against Fiji than the one that saw them scrape a victory over Samoa last week. Remember Fiji beat England in their warm-up match ahead of the World Cup and they beat Australia in the group stages. It’ll be a tough match, as will all of the quarter final matches.


Have a great weekend, hope it dries up a bit!

- 09.00 BoEs Bailey speaks

- 10.00 EU industrial production

- 14.00 ECBs Lagarde speaks

- 15.00 US Michigan sentiment survey

- 17.30 BoEs Cunliffe speaks

- 19.00 US monthly budget statement

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