Rising US core inflation keeps 2015 Fed hike alive
16/Oct/2015 • Currency Updates•
The US Dollar received a welcome boost yesterday from better-than-expected inflation data and another impressive set of jobless claims in the US. The data will be welcome news to the Federal Reserve, which last month cited low inflation as one of the primary reasons behind delaying an interest rate hike.
Today will be relatively light in terms of key economic data. Any surprises in Eurozone inflation data this morning could cause volatility in the Euro, while industrial production in the US this afternoon will be heavily scrutinised.
The Pound had a mostly strong performance yesterday, despite little in the way of announcements in the UK. Sterling recovered ground at the end of the day to finish 0.1% higher against the Dollar and 0.75% higher versus the Euro.
A lack of data out of the UK yesterday meant that all attention turned to the US, with Sterling volatility mostly driven by mixed data in the US.
Domestically, the latest poll of analysts from Reuters suggested that the Bank of England will still hike interest rates in Q1 of 2016, despite potential risks of prolonged low inflation. 23 out of the 44 economists surveyed suggested that a rate hike in the first three months of the year was a probability. Accelerating wage growth and steady levels of economic growth point to an increase in rates sooner than the markets are currently pricing in.
A strong performance for the US Dollar and Pound Sterling led to losses against both for the single currency yesterday. The Euro ended 0.6% down versus the Greenback.
No data in the Eurozone meant that attention turned again to the ECB and whether it would be expanding its QE programme. Bank of Spain Deputy Governor Fernando Restoy suggested that the programme could be prolonged if it fails to reach its target.
Meanwhile, ECB member Ewald Nowotny suggested that the Euro-area’s inflation level was “clearly” undershooting its goal. Speaking at a conference in Warsaw, Nowotny claimed that an additional set of economic instruments were needed for the central bank to reach its goals.
Such comments further support our view that the European Central Bank will look to expand its existing asset purchasing programme at some point between now and the first quarter of 2016.
Eurozone inflation data will likely be the focus in the Euro-area today when released at 10am UK time. Trade balance data from Eurostat will also be worth noting.
The US Dollar reversed some of its recent losses against its major peers, although trailed off towards the end of the London session to finish 0.4% higher for the day.
Economic data out of the US economy proved to be mixed yesterday. The inflation outlook was given a boost by better-than-expected CPI figures, which showed that price growth in the US was flat in the year to September, rather than negative as many forecasters had anticipated. Cheaper fuel prices were once again the main culprit, with energy prices falling by 4.7% in September alone.
Critically, the level of core inflation, a measure more closely followed by the Federal Reserve, surprised on the upside, increasing by 0.1% to 1.9% last month. This moves the level of core inflation closer to the Fed’s 2% target, and will provide good support for an interest rate hike in 2015.
In another encouraging sign of a tightening in labour market conditions, initial claims for jobless benefits once again declined last week, falling from 262,000 to 255,000.
However, the Dollar’s rally was curbed late in the day by some disappointing manufacturing data. The Philly Fed manufacturing survey posted another underwhelming performance, declining by 4.5 points in September, following the previous month’s -6.0 reading.
Elsewhere, Fed member Dudley warned that growth in the US economy might be slowing, while St. Loius Fed President James Bullard suggested that it would be difficult for the Fed to reverse its current course and hike rates in October.
Rest of the world
The Egyptian central bank conducted a further devaluation of its currency yesterday. This was in line with our forecasts and its first devaluation since July. The Egyptian Pound was allowed to weaken from 7.73 to the Dollar to 7.83.
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