EUR/USD Remains Steady Despite Lower-Than-Expected US Core CPI
- U.S. overall consumer price inflation was as expected in September, with headline CPI up 0.3%, but the ex-food and energy measure had a modest 0.1% uptick instead of the 0.2% gain expected. That brought yoy growth in the headline to 1.5% from 1.1%, its highest in just under two years, but the core rate retreated to 2.2% from 2.3%, still implying that the core PCE growth rate will remain a little shy of the Fed's target.
- The three-month annualized rates showed some cooling, down to 1.6% from 2.1% for all items, having peaked at 2.6% in July. Excluding food and energy, the annualized rate slipped to 1.9% from 2.0%, lowest since last October, its peak being 2.7% from back in March. That will be little excuse for the Fed, which is looking down the road to a time when full employment should lead to rising wages.
- Energy prices were up a hefty 2.9%, explaining the entirety of the difference between the headline and core, as food prices were flat. The most notable category within the core was shelter costs, about a third of the total, which were up 0.35%. That series has been heating up over the past several months, explaining a significant amount of the difference between CPI and the Fed's preferred PCE, which gives a lower weight to shelter. The medical care index rose just 0.2%, however, its slowest appreciation in six months, and that category is given more weight in the PCE numbers.
- The markets anticipate that the Fed will keep rates steady at its November meeting and then hike rates at its upcoming meeting in December.
- The USD stepped back on Wednesday after U.S. consumer prices showed a moderation in underlying inflation, prompting markets to trim bets on a December Federal Reserve rate hike. Fed fund futures imply around a 65% probability of the Federal Reserve raising interest rates by December, down from 70% ahead of the U.S. CPI data.
- Federal Reserve Bank of Boston President Eric Rosengren said the U.S. central bank is already running the economy hot enough to overshoot his estimate for the lowest sustainable level of unemployment and to reach its goal for 2% inflation. Rosengren said this strategy has helped bring more people into the labor force, but if pushed for too long risked triggering higher inflation or asset price bubbles that would force a more severe reaction from the Fed. Rosengren was one of three members of the Federal Open Market Committee to dissent in September when the panel opted to leave rates unchanged, joined by Cleveland President Loretta Mester and Esther George of Kansas City.
- The EUR/USD stabilizes just below 1.1000. Monday's two-and-a-half-month low of 1.0964 is an important support level now. A break of that level could open the way for a test of 1.0912, a low marked on June 24 in the wake of the Brexit vote. Tenkan and kijun lines are negatively aligned and the EUR/USD is capped by 7-day ema and 76.4% fibo of June-August rise. But technical analysis plays a minor role now. The EUR is weighed by wariness ahead of the European Central Bank's policy meeting on Thursday. The central bank is widely expected to keep its policy unchanged with any decisions on the future of its asset purchase scheme expected to be deferred until December. We do not think that the central bank meeting will contribute to currency headwinds - we think the risk rather lies to the upside for the EUR/USD.
EUR/GBP Falls On UK Earnings Data
- Job creation in Britain slowed in the three months to August. The number of people in work rose by 106k between June and August, down from gains of more than 170k in each of three previous readings. The unemployment rate held at a nearly 11-year low of 4.9%, in line with market expectations.
- The Office for National Statistics said workers' total earnings including bonuses rose by an annual 2.3%, as expected and compared with 2.4% in the three months to July. Excluding bonuses, earnings rose by 2.3% yoy against expectations for a 2.1% yoy rise.
- Inflation rose to 0.9% in September and is expected to climb sharply towards 3% by the end of next year, reflecting the sharp fall in the value of the pound since the Brexit vote and threatening to hurt the spending power of workers. The Office for National Statistics said in real terms - measuring regular pay against inflation - earnings rose at their slowest pace since February 2015.
- The GBP strengthened after British jobs report. There are two important support levels ahead – yesterday’s low at 0.8914 and 14-day ema at 0.8907. Breaking below these levels will open the way to our short-term position target at 0.8860.
USD/CAD: Loonie Stronger On Oil Prices, Eyes On BOC Now
- The CAD continues to appreciate against the USD on higher oil prices. Oil prices rose by around 1% on Wednesday, lifted by a report of a drop in U.S. crude inventories and declining production in China, while an upbeat OPEC statement on its planned output cut also supported the market.
- U.S. crude stockpiles fell 3.8 million barrels in the week to Oct. 14, to 467.1 million barrels, the API reported late on Tuesday. The U.S. Energy Information Administration is due to release official crude and fuel storage data later on Wednesday.
- Mohammed Barkindo, secretary general of the OPEC, said he was confident about the prospects of a planned production cut following an OPEC meeting on November 30. In its first output cut agreement since 2008, OPEC said it plans to reduce production to 32.50 million to 33.0 million barrels per day, compared with record output of 33.6 million barrels per day in September.
- Domestic manufacturing data reinforced a view that Canadian economic growth rebounded in the third quarter. Manufacturing sales rose by 0.9% in August from July, stronger than the 0.2% gain expected.
- Investors are turning their attention to the Bank of Canada, which is due to release its latest economic forecasts along with an interest rate decision today (14:00 GMT). It is widely expected that the central bank will keep interest rates unchanged. We do not expect any dovish suggestions from the Bank of Canada and forecast no rate changes in the coming months.
- We keep our bearish USD/CAD outlook. Current short-term downward trend may stop for a while near an important support of 1.2986 (38.2% fibo of May-October rise and 23.6% fibo of January-May drop), which is also close to the rising trendline.
