USD: Persistent CPI should maintain dollar support – ING

Reading the September FOMC minutes, there did not appear to be a sense of urgency on the Fed’s part to lower rates, although it did reduce rates by 50 bps. Rather, there was a sense that the inflation scare was over, unemployment was rising and a risk management approach required a recalibration of policy. There were no strong signals about how quickly rates would be cut to less restrictive levels, and of course the future pace of rate cuts would depend on the data, says Chris Turner, FX analyst at ING.

Geopolitical uncertainty will help the USD

“The reason the markets didn’t do much is that we have already seen a considerable adjustment in US short-term rates since late September. The Fed’s terminal rate for this easing cycle has been revalued by 50 bps in the And short-term yields have moved significantly in favor of the dollar. EUR:USD two-year swap spreads have widened from 85 bps to 130 bps in about three weeks, it is no surprise that the EUR/ USD is falling towards 1.09.”

“Can US short-term rates go much higher from here? We suspect probably not. But we could find out today if the US September CPI turns out to be slightly above consensus at 0.3% MoM. That won’t be a obstacle to a 25bp Fed cut in November, but perhaps it will give the Fed a little less room to pursue more aggressive easing. Also, later today we have two more Fed speakers in the form of Tom Barkin. and John Williams, both seen as moderate hawks.”

“The FX market is choppy due to China’s stimulus measures and continued instability in the Middle East. Investors anticipate that China’s Ministry of Finance will announce a new bond issuance of CNY 2-4 trillion this Saturday, which is supporting commodity currencies. However, the bearish flattening of the US yield curve remains a negative factor for these currencies. The DXY could make a bid for the 103.35 area if the CPI. US underlying surprises to the upside today. Geopolitical uncertainty should also help the dollar.”