USD Surges Higher
Wednesday’s US inflation data has effectively thrown a spanner into the works for FX markets. Ahead of the release, the US Dollar had ben relatively subdued. The Fed’s tapering announcement earlier in the month was delivered with a cautious message which pushed back against the expectations that rate hikes might be coming any time soon. Indeed, even with QE scheduled to end around the middle of next year, the Fed warned that rate hikes would not necessarily follow immediately. Additionally, the Fed seemed to resurrect its view that the current inflation spike would prove to be temporary and, once again, put the focus back on the labour market.
Fed Tightening Expectations Lift
However, USD was sent firmly higher midweek as October’s inflation data came out much stronger than expected. At 6.2% annually, the October rise was the largest increase in prices over the last 30 years. As a result of the data, short-term US yields have risen firmly with traders now bringing forward their rate hike expectations from later next year to June 2022, according to the CME FedWatch tool.
Risk Assets Under Pressure
The broader impact from the shift in USD has seen risk assets coming under pressure. Commodities, and commodity linked currencies are on the backfoot. Equities markets are in decline also, putting an end to the recent bull run, for now. The rally in gold, which saw a technical breakout this week, has also paused for now.
US Retail Sales In Focus Next Week
The key to determining the near term direction for markets will be the extent to which this current USD move lasts. If the current move higher proves to be reactionary and short lived, we are likely to see the market defer back to recent themes. With this in mind, the focus will be on incoming US data next week. The key release to watch is retail sales, which is a key component in the GDP calculation. If retail sales come in strong we are likely to see the current USD rally gather further steam. However, if retail sales miss, this will take some of the shine out of October’s inflation data, likely seeing USD unwind somewhat.
Technical Views
DXY
The rally in the Dollar this week has seen price breaking out above the 94.63 level as the bull channel continues to develop. With both MACD and RSI firmly bullish, the focus is on a continuation higher in the near term with 95.83 the next upside marker to note. To the downside, any correction below the 94.63 level will bring 93.91 into view as the next support, underpinned by the bull channel support.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.