US Dollar rises on strong inflation data; markets look to Fed rate decision

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19 September 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar rose across the board last week, buoyed by US inflation data that surprised to the upside.

T
he core inflation measure, which excludes volatile items, is now well above the Fed’s 2% target. This is a key data point as we ready for the critical September meeting of the Federal Reserve Open Market committee on Wednesday. We expect no change in interest rates, which is in line with the majority of economists, but we do expect a hawkish statement and a raft of dissenters calling for hikes.

This would set the stage for an almost certain hike in December, with an outside chance that it comes even earlier. Businesses with exposure to a stronger US Dollar will be covering their needs early this week.

Meanwhile, Sterling fell straight back to the lows of its recent ranges against both the Euro and the US Dollar. There were little news to justify the sharp fall, as the Bank of England provided scant new information in its September meeting.

Special mention goes to the Canadian Dollar and Mexican Peso. They both had a difficult week, hit by the news that Trump is closing the poll gap with Clinton in the US Presidential Election. This is the first significant spillover of the atypical US election cycle into global financial markets and we’ll be paying very close attention to how it evolves.

FiveThirtyEight, a US opinion poll website, which generates probabilities on the outcome of the election vote, shows that the chances of a Trump victory in November has increased rather significantly in the past month or so (Figure 1).

Figure 1: FiveThirtyEight US Presidential Elections Odds (June ‘ 16 – Sept. ‘16)

Major currencies in detail:

GBP

Sterling’s sharp falls last week were at odds with mild macroeconomic data and statement from the Bank of England.

Modestly softer inflation and retail sales news were mixed with reassuring July labour market data. Meanwhile the Bank of England acknowledged the stronger than expected UK data since the referendum. The general note of the meeting suggests that the additional 25 basis point rate cut, which markets expected to happen in the last quarter of 2016, is far from certain.

This week is almost completely lacking significant economic releases so Sterling will largely take direction from the FOMC meeting on Wednesday.

EUR

In the almost complete absence of significant news from the Eurozone, the Euro mostly traded in line with news out of the US last week.

Not surprisingly, the strong US inflation data on Friday knocked the Euro down to just below 1.12.

This week we receive the key September flash PMI indicators of business confidence. We expect little change in the continent-wide composite indices. This lackluster pattern should prevail for the next couple of weeks until the fall political calendar heats up and markets start to set their sights on the ECB meeting on the 20th October.

USD

The key news out of the US last week was the notable upside surprise in August inflation.

Housing and medical expenses both drove a 0.3% monthly increase in the core inflation index, which excludes volatile food and energy components. These are precisely the sort of domestic price pressures that will not be alleviated by a strong Dollar, and we expect the Federal Reserve to be paying close attention to this data.

The positive inflation news may not quite tip the balance towards a hike at this week’s FOMC meeting, but we do expect a hawkish statement that acknowledges inflation and labour market strength and prepares markets for another hike before year end.

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