Daily Key points: Big downsize surprise of CPI ignites volatility

The US Dollar fell sharply yesterday to a fresh 8 week low, as the inflationary pressures eased more than expected according to the latest CPI print. The year-on-year CPI headline rate fell to the 7.7%, well below the 8.0% anticipated and the 8.2% reported last month. The month-on-month rate also fell more than anticipated with the actual rate easing to 0.4% compared to the 0.6% which was widely expected. Furthermore, the Core CPI rates that exclude fresh food and energy prices, experienced similar declines, easing more than expected. Overall, the results suggest that inflationary pressures have peaked and are on the retreat which in turn may incentivize the Fed to slow down its rate hike path and take its foot of the gas pedal. Currently the FFF implies an 73% probability for a 50-basis points rate hike in the December meeting, and even thought the recent easing of inflationary pressures support the view, the market still has to assess incoming data for employment and consumption leading to the meeting. Gold prices have also risen on the back of a weakening dollar, attracting safe haven inflows and are set to end the week significantly higher. US stock markets soared on CPI downside surprise with all three major indices namely the Nasdaq100, S&P500 and Dow Jones all recording incredulous gains and market participants started the debate of whether the equities markets have reached the bottom of the bear market. Philadelphia Fed President Harker welcomed the positive news of inflation slowing down and sees the ground for slowing hikes in coming months and believes that 50 basis points are still needed. Dallas Fed President Logan commented that policy must focus on promptly restoring price stability. After the positive results the US 10-year treasury yield was on the retreat, falling below 4%, finding a bottom near the 3.8% region, in a sign of relief from capital markets as the results are expected to ease pressure from the Fed’s shoulders. On another note, the weekly initial jobless claims figure has risen to 225k surpassing expectations signaling a slight loosening of the tightness of the US labour market conditions, however from a historical point of view the reading is considered to remain relatively stable.

UK’s GDP rate watched by pound traders

The pound surged against the dollar during yesterday’s session and today markets’ attention turns to the preliminary quarter on quarter GDP rate for Q3. According to estimates the quarter-on-quarter GDP rate for Q3 is expected to contract to -0.5% compared to the 0.2% of the previous quarter and should the actual rate meet the expectations we may see the pound weakening as that would confirm that UK has entered the recessionary cycle. Furthermore, another point of interest for the UK economy may be the release of the month-on-month Manufacturing Production rate for September, which is expected to rise to -0.4% and should that meet expectations we may see the sterling receiving support.

USDIndex fell sharply yesterday after the cooler than expected CPI print. We hold a bearish bias for the index given the recent mover, however we note that there may be a correction due as the RSI indicator fell to oversold levels and the price action exceeded the lower bound of the Bollinger band. Should the bears remain in control, we may see the break below the 107.40 (S1) and a move near the 106.80 (S2) base. Should bulls take over, we may see the break above the 108.30 (R1) and a move near the 109.10 (R2) barrier.

GBP/USD was on the rise yesterday on the back of the weaker dollar, breaking past previous resistance at 1.1650 and currently heads for the 1.1750 (R1) level. We hold a bullish bias for cable given the recent move and supporting our case is the RSI which highlights the bullish sentiment surrounding the pair. Should the bulls reign over, we may see the break above the 1.1750 (R1) and head for the 1.1900 (R2) level. Should the bears take over, we may see the break below 1.1500 (S1) and head for the 1.1300 (S2) base.

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We also note the release of Germany’s HICP rates for October and the preliminary Michigan consumer expectations for November from the US. Furthermore, we highlight the scheduled speeches by ECB’s Vice President de Guindos, SNB Chairman Jordan, ECB’s Chief Economist Lane and New York Fed President Williams.