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  • richard evans

US inflation numbers to set the tone for USD into year end

Good morning

It was a fairly quiet day in the currency markets yesterday as we’d anticipated. GBPUSD was stuck around the 1.2550 area, very much the same as yesterday morning, EURUSD was a few points lower around 1.0745 which meant GBPEUR ticked a smidge higher to hit almost 1.1700 through the afternoon but this morning we see EURUSD at 1.0775 while GBPUSD is around 1.2560, bringing GBPEUR is back to 1.1655.

The slightly lower GBP came after UK employment numbers were released earlier this morning, they were broadly in line with expectations, if anything they looked very slightly better to me, particularly given a positive revision to last months release, although this was offset by a slightly lower than expected average earnings number. It is the latter that will likely please BoE most of all, high wage growth has helped drive inflation and any decline is helpful although at these elevated levels it is likely still too high if we are hoping to see inflation move back towards target. UK GDP tomorrow morning is important but likely to be overshadowed by other economic events.

The US dollar is off its recent highs ahead of today’s key inflation release. We’d have to see something seriously away from expectations for the market to adjust its ‘no change’ thinking for the Fed announcement this week but nevertheless todays report does have the potential to push the dollar around. For the record, markets are looking for a headline of 3.1%, down from 3.2% last month, with a core reading unchanged at 4%. A higher number must surely be USD positive.

USDJPY is lower in line with the general USD weakness. Having hit a high yesterday around 146.60, it currently trades at 145.45. We have seen a decent amount of volatility in Yen over the past few days and swings of 100 pips are becoming the norm. USDJPY is certainly nervous and the CPI and/or Fed announcement could push USDJPY around more than others. Vols are high as a result which makes options expensive, too expensive really unless you get really lucky.

A good example of this is the cost of the overnight at the money straddle which is priced over 120 yen pips. I’ll give more detail about what that means another day, but as a very rough guide it can suggest the markets are looking at a move somewhere in that magnitude.

We’ve seen a bit of downside interest in EURJPY, UBS techs in particular has suggested going short around 157.50 with a target of 152.20. Meanwhile UBS research think that US could cut rates to 2.75% next year, taking USDJPY to the 130.00 area.

We will hear from Feds Powell at tomorrows FOMC rate announcement and how he responds to the inflation number will likely set the tone for USD into year end. We’d expect him to continue with the ‘higher for longer’ narrative despite some market thinking that Fed could reduce rates at a faster pace next year, although there is potential for Powell to suggest US rate may have peaked.

I mentioned yesterday how I’d like to see stricter rules on footballers surrounding referees. We know referees don’t always do a good job but they are faced with huge amounts of pressure and hatred. None more so than in Turkey, where it has been reported that a referee in the highest level of Turkish football was attacked on the pitch and hospitalised by the President of one of the teams. The Turkish FA has suspended all leagues for the time being following the attack.

For those down on the Isle of Wight, you’re advised to stay away from Ventnor after a landslide on Sunday saw some residents having to leave their houses. Drone images show a huge section of cliff having fallen away.

Other than the US data, the other event of interest today will be the MPs vote on the governments Rwanda bill. Sunak is wooing Tory MPs this morning to encourage them to back the bill. The scheme has met with huge criticism to date and a defeat for Sunak would be another sign that his leadership could be drawing to an end. I may be in a minority here but I think the plan has merit.

A controversial view I know, and one that opens me up to being accused of many unsavoury things, but those people coming to the UK in small boats looking for safety have surely already found safety in France. If they ventured from the safety of France to find safety in the UK, who should we not then lead them to safety, albeit in another country? Ultimately I believe the system is more to act as a deterrent to those thinking of making the dangerous journey in small boats.

I feel so deeply for those people who have been ousted from their homelands, losing everything they own and forced to find refuge overseas. Mind you I was reading the other day about a family who escaped Somalia seeking refuge in the UK, we’ve helped them out with housing and benefits, but they still travel back to Somalia for their holidays. Something isn’t quite right there. Anyway, we’ll see whether Sunak can convince his own MPs to follow the party line.

- 10.00 German ZEW

- 13.30 US CPI

- 19.00 US monthly budget statement

- 23.50 Japan Tankan survey

- 07.00 UK GDP, industrial production

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