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US Dollar pushes higher as US inflation comes in higher than expected

Good morning

A rather splendid weekend weather-wise but I found myself stuck a dark room indoors as hayfever seemed to hit record highs. I’m not the only one suffering for worse than normal. In fact last year i thought I’d finally grown out of it, so mild were the symptoms. Not so now unfortunately. On the plus side with F1, Le Mans and England/NZ test match, it wasn;t perhaps as bad as it could have been. A bit annoying though to look out at another sunny day thinking I’m going to have to stay indoors.

I’d warned Friday that the risk to US inflation would be to the upside, and indeed US inflation did come in higher than expected which sent US dollar marching higher Friday afternoon. EURUSD traded to 1.0505 while GBPUSD slumped to 1.2315 and those moves have continued this morning with EURUSD trading down to 1.0470 and GBPUSD to 1.2240. They had moved off those lows but there is talk doing the rounds that Fed will increase rates 75bps at next weeks FOMC, several major banks have changed their forecasts accordingly, which is likely to keep support for USD high, and as I type both pairs are trading back to those lows.

The additional bout of USD strength overnight and in the early hours sent USDJPY to 135.15, and although it did come off a little after it is now still above what I think was the important 134.50 area. Japan officials have tried to talk USDJPY lower, with limited success, saying rapid yen weakening is not good for the economy.

The question of raising rates faster will soon be asked of other central banks. UK have started to raise rates and look like they will raise again by 25bps on Thursday, but should they be doing more, while ECB have watched inflation climb without acting at all as yet, although a rate rise is expected next month. I’d imagine we’ll see talk of larger rate rises before their next meeting.

BOE have their work cut out though. Data this morning disappointed, with GDP, industrial and manufacturing production all coming in well below expectations. In addition UK look set to announce changes to the NI protocol today which will certainly upset EU. EURGBP currently 0.8550 (GBPEUR 1.1695). The near-certain 25bps rate rise on Thursday is likely to be priced in and therefore offer limited support for GBP.

In France, Macron’s coalition is level with the left/green alliance in this weekends elections, both with 25.7% of the vote. Turnout was a disappointing 47.5%. The next round of votes takes place next week and both sides will be calling on more voters to step forward.

I don’t like the noises coming from China over Taiwan. China have said they will go to war with anyone looking to take Taiwan away from China, while also saying the Taiwan Strait should not be regarded as international waters. The US say the Taiwan Strait is regarded as international waters and as such will continue to sail there. Elsewhere in China, fears of a lockdown in Beijing still remain as Covid cases accelerate there. Taiwan have said they are willing to talk to China in goodwill on the understanding they meet as equals. Can’t see that happening. I fear China will be inspired by the recent Russian invasion of Ukraine.

A somewhat limited calendar for the rest of the day but it does get busier over the rest of the week.

- 19.00 Feds Brainard speaks

- 02.30 AUS house price index, NAB business conditions

- 05.30 Japan industrial production

- 07.00 UK unemployment

- 07.00 German CPI, HICP

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