DXY depreciated 2.4% to 107.89 on US CPI inflation falling to 7.7% YoY in October, its lowest level since January. Core inflation fell to 6.3% from its 6.6% peak. Dow, S&P 500 and Nasdaq Composite rallied 3.7%, 5.5% and 7.4% respectively, on conviction for a smaller Fed hike in December after four 75 bps increases. The US Treasury 10Y yield tumbled 28 bps to 3.81%, while 2Y declined 25 bps to 4.33%. The outlook for the USD has weakened. The DXY broke the neckline of the head-and-shoulders formation we flagged on Wednesday and below its 100-day moving average of around 109. However, we do not dismiss a squeeze to the neckline around 109.30 on profit-taking ahead of the weekend. Today, consensus expects the University of Michigan’s Survey of Consumers to show 1-year inflation expectations rising to 5.1% in November from 5% in October and 5-year expectations unchanged at 2.9%.
Next week, the market could invite backlash from Fed speakers, especially Vice Chair Lael Brainard and St Louis Fed President James Bullard, if US bond yields fall more. Despite the encouraging CPI readings and belief that longer-term inflation expectations are not unhinged, the Fed still considers inflation too high above its 2% target. The Fed is presently debating scaling down rate increases to no less than 50 bps next month. It is not discussing where or when rates will peak and pause at next year. The Fed also signalled its intention to lift its 2023 rate projection in December from the 4.6% pencilled in September. San Francisco Fed President Mary Daly said the strong USD was a headwind to global growth. Let’s see if more Fed officials share her opinion.
GBP appreciated a whopping 3.2% to 1.1716, its highest close since 29 August. Today, expect profit-taking on a preliminary contraction of 0.5% QoQ sa (consensus) in UK GDP in 3Q22 from 0.2% growth in 2Q22. Yesterday’s spike broke the year’s trendline resistance and opened the door for a recovery in GBP. Bulls will look for an expansion in gross fixed capital formation to offset the contraction in private consumption expenditure from the cost-of-living crisis. Next week, the upside of GBP will depend on the Budget Statement on 17 November, which is shaping up as a positive event. Chancellor Jeremy Hunt should deliver GBP60bn of tax hikes and spending cuts to plug the fiscal gap. Hunt expects the Office for Budget Responsibility (OBR) to project government debt as a falling proportion of income. To extend its upside, GBP needs to clear a key resistance around 1.1760.
Quote of the day
“Patience is bitter, but its fruit is sweet.”
Jean-Jacques Rousseau
11 November in history
Singles’ Day originated in China at Nanjing University in 1993.
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