Forex Today: US Inflation Exceeds Forecasts; US Dollar Rises, Gold Falls

Yesterday’s US CPI data showed inflation cooling by less than expected, triggering a rise in the US Dollar and Treasury yields. Headline consumer prices increased by 0.4% in October, above the 0.3% forecast but below September’s 0.6%. More importantly, Core CPI rose by 0.3%, unchanged from September and above the expected 0.2%. The report therefore failed to deliver the underlying slowdown markets had been looking for. .

Markets are now reassessing the possibility of a larger December Federal Reserve rate hike. Fed Governor Christopher Waller said yesterday that a sufficiently strong inflation reading could lead him to favour a 0.50% increase, and the subsequent CPI release strengthened expectations of more aggressive tightening. The important change is that attention has shifted from whether the Fed will hike towards how large the increase might be. A half-point move remains a possibility, not a confirmed decision. According to the CME FedWatch Tool, markets see a rate hike in December as a certainty and give a 13% change to a 0.50% hike happening

US stock markets retreated yesterday as higher interest-rate expectations interrupted the recovery, but have recovered much of the loss in overnight trading. The S&P 500 Index fell approximately 0.4%, the Nasdaq Composite lost 0.7%, and the Dow Jones Industrial Average declined 0.3%. Technology was the weakest major S&P sector, falling approximately 1.4%, while financials gained. The losses were modest compared with Monday’s strong advance, but they show that cheaper oil alone is not enough to sustain the rally when the interest-rate outlook becomes less favourable.

In the Forex market, the US Dollar has reversed its earlier decline. The Dollar Index gained approximately 0.5% yesterday and edged higher towards 102.29 in early Asian trading this morning. The Australian Dollar was particularly weak, losing approximately 0.9% yesterday. This is a change from the risk-sensitive currency strength seen at the start of the week, with the market again rewarding the Dollar as US rate expectations rise. Fundamentally, the US Dollar is the strongest major currency, while the Canadian Dollar is the weakest, putting the USD/CAD in focus which gave a great long trade yesterday after making a double bottom at the 1.4109 support level. The EUR/USD also remains within a long-term bearish trend and is near its long-term low after falling yesterday.

Treasury yields have risen sharply, adding pressure to Gold and growth-sensitive stocks. The US two-year yield jumped approximately 20 basis points yesterday as traders repriced the near-term Fed outlook. The speed of that move is important: it reflects a substantial adjustment in expected policy, rather than simply a reaction to fluctuations in crude oil prices.

Gold has fallen back towards the important $4,000 round number. The precious metal lost approximately 2.6% yesterday before recovering slightly to around $4,031 in early trading this morning. The stronger Dollar and higher yields have interrupted its recent bullish recovery, leaving the previously identified $4,200 resistance area unchallenged. Holding above $4,000 would preserve an important part of that recovery; a sustained break below it would weaken the immediate bullish picture. The bullish breakout a few days ago from the descending price channel has been disappointing.

Crude Oil rebounded modestly after extending its decline yesterday. Brent rose approximately 0.7% to $92.16 in early Asian trading after briefly reaching $89.16 overnight. Expectations of progress towards ending the Iran conflict remain a major influence, but today’s bounce is small relative to the recent decline. For now, this looks more like a recovery from depressed levels than evidence that the broader bearish move has reversed. Note that WTI is still trading below its former crucial support level at $87.68 which might now act as a resistance level.

Bitcoin is looking bearish after making a fresh 2-month low yesterday below $73,000.

It is a public holiday today in the USA, Canada, and France today, so trading in some assets will probably be slow during US business hours.