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FX Market Trading Cautiously Ahead Of U.S. CPI

Published 10/12/2021, 08:19 am
Updated 09/07/2023, 08:31 pm
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The U.S. dollar traded higher against all of the major currencies Thursday with the exception of the Japanese yen. The Federal Reserve meets next week and faster removal of policy accommodation is widely anticipated. Today’s jobless claims report confirms that the labor market is blazing hot. The number of new jobless claims dropped to 185,000 last week, its lowest level since 1969. Read that again – 1969. That is a 52-year low. Weekly claims can be very volatile, but there’s been an irrefutable downtrend that reflects the tightness of the labor market. Employers are reluctant to lay off workers when there’s a shortage of willing applicants, which can be problem for wage growth. 
 
U.S. inflation numbers will be released tomorrow and economists are looking for the monthly CPI growth rate to slow and the annualized rate to accelerate. Given Federal Reserve Chairman Jerome Powell’s recent comment that it is time to retire the word “transitory” from the central bank's inflation description, prices will rise at its fastest pace in 30 years with a good chance of an upside beat in monthly CPI. Gas prices were high throughout the month of November, with many Americans reporting an increase in the costs of Thanksgiving dinner. Traders are cautiously buying U.S. dollars and selling stocks ahead of Friday’s CPI report. If inflation is stronger than expected, rate hike bets will increase, driving the U.S. dollar higher against euro, sterling and the Canadian dollar, while also taking stocks lower. 
 
All three of the commodity currencies traded lower. The Canadian dollar extended its slide after the Bank of Canada said gasoline prices have recently declined. The BoC expects CPI to remain elevated into next year and ease back to around 2% in the second half of the year. The rising dollar also drove oil prices lower, adding pressure on the loonie. Softer Chinese inflation data drove the Australian and New Zealand dollars lower. Tonight’s New Zealand PMI report will be in focus for NZD.
 
The rising U.S. dollar also took EUR/USD below 1.1300. While a smaller trade surplus for Germany may have contributed to the move, the real worry is that Eurozone nations will follow the U.K in imposing new restrictions. The daily case count in the U.K. is at its highest level since January. That was the same month that new cases hit a record high of 68,000. Cases in Germany hit record highs this month, and yesterday it reported the highest daily COVID deaths since February. Calls are growing for restrictions ahead of Christmas holidays. 
 
Tomorrow’s German CPI report is not expected to have a significant impact on the euro. Sterling, on the other hand, could be affected by monthly GDP and industrial production numbers – both of which are expected to be stronger. The Bank of England meets next week and investors will be eager to see if Omicron has affected its plans to remove stimulus.  

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