USD recovers on reduced ‘tapering’ mood

US consumer price inflation was surprisingly subdued in August. A 0.1% monthly rise brought the annual rate of inflation down to 4%. That was certainly at odds with my expectations and I wasn’t alone, so it seems. The immediate market reaction was to question whether the US Federal Reserve could consider tightening monetary policy when the pace of inflation has slowed.

The USD strengthened. GBPUSD, which had kissed the underside of $1.39 early in the day (don’t worry, you can’t catch anything from it) fell a full cent but has recovered a little to $1.3815 this morning. The EURUSD rate performed a similar volte-face; albeit slightly less dramatic. The high of the day was $1.1845 and this morning’s starting point is $1.1800. This afternoon’s US industrial production data is the next hurdle.

China’s industrial production grew at 5.3% in the year to August, its slowest pace since July 2020. Fresh covid outbreaks and supply chain problems were cited as reasons for the dip. The impact on the Chinese Yuan will be minimal because, although it is considered a very bad form to call China a currency manipulator, they do exert a large degree of control over their currency, which is mechanically pegged to the USD.

The impact on the currencies of countries that supply China is usually more obvious. If China needs less raw materials, their exports suffer.

AUD bounces back from impact of poor Chinese data

The Australian Dollar and the New Zealand Dollar both mounted recoveries against the Pound yesterday after a sharp deterioration the previous night. That recovery reversed again on the Chinese news. GBPAUD starts Wednesday at 1.8880 in London and the GBPNZD rate is back up to just below 1.95.

The same pattern can be seen in the Canadian Dollar. Whilst Canada’s commodity exports mostly head to the US and not China, a Chinese slowdown will knock global commodity prices and weaken the income Canada receives from raw material exports. GBPCAD spiked to 1.7570 yesterday. Overnight it has been down to 1.7507 and is back up to 1.7540 as I write. We will see Canada’s consumer price inflation later. Will that follow the rest of the world or the US? No one knows. So it will be interesting and the Canadian Dollar will be volatile.

Sterling picks up as CPI beats forecasts

Part of the bounces in the value of the Pound, mentioned above, is the August UK inflation data (released this morning) which showed a rise of 3.2% on the year at a consumer level. Producer prices were also up 0.4% in August. Both datasets were much stronger than expected and that inevitably suggests earlier monetary policy tightening from the Bank Of England. We have to suspect the BOE will not be hasty in raising base rates or cutting back on bond-buying but there is no certainty of that.

Lastly, the euro has been pretty sanguine of late but we have Eurozone industrial production data today, average wage rises for the Eurozone, and a smattering of inflation numbers from EU states.

It will be a very busy day. I hope yours is a good’un.

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