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USD weaker on softer inflation

A drop to 7.1% in the US Consumer Price Index; down from 7.7% in October, caught the markets a little bit by surprise yesterday. forecasters had been expecting softer data but this was more elaborate than had been expected. Even the core inflation data, which excludes the more volatile elements of food and energy, fell from 6.3% to 6.0% in November. The immediate market reaction was to sell the US dollar and we saw the GBPUSD rate shoot up to $1.2435 before settling back to $1.2375 this morning. The EURUSD rate did a similar thing, rising by 1% in a matter of minutes to $1.0660 before settling back on profit taking. That pair starts Wednesday at $1.0635. Whether this slow down in inflation will impact the decision by US Federal Reserve this afternoon is the main talking point. Most people are expecting the Fed to deliver an interest rate hike this afternoon; probably 50 basis points or thereabouts but it may convince the Fed that they have done enough for now and produce a slightly more dovish statement. If that is the case, further US dollar weakness is a real prospect.

UK inflation softens but sterling holds firm

This morning started with the release of UK consumer price inflation data. as expected, the pace of inflation has slowed slightly; down to 10.7% in the year to November against an October figure of 11.1%. Core inflation was also down; 6.3% against the previous month 6.5%. Just like the US, Britain has an interest rate announcement due from the Bank of England but that decision will be made tomorrow. There is a strong chance though that the BOE will deliver an interest rate hike of half of one percent but, as with the US, it will be interesting to see whether Britain’s central bank considers slowing the pace of interest rate hikes for their next few meetings. As mentioned above, the GBPUSD rate is elevated this morning at $1.2375 but the GBPERUR rate is largely unchanged at €1.1625. 

Strong Tankan index strengthens JPY

The Tankan indices of manufacturing and industrial sentiment were all better than expected when they were released overnight. They immediately strengthened the Japanese yen. GBPJPY is down roughly to to JPY 167.25 this morning and the weakness of the US dollar meant the USDJPY rate fell a more dramatic three yen to JPY 134.70 before recovering a tad to JPY135.35. Interestingly, industrial production data, released in the early hours of this morning, was weaker than expected but that hasn’t put yen buyers off. We will see Japanese import and export data tonight and Chinese industrial production data, which also impacts demand for Japanese goods. So further yen volatility is almost inevitable.

NZ GDP data expected to strengthen Kiwi dollar

Yesterday’s sterling strength saw the GBPNZD rate climb by a cent to NZD 1.9185. We can expect significant volatility in this pair overnight tonight when New Zealand releases economic growth data for the third quarter of the year. The markets are forecasting a significant bounce from growth of 0.4% in Q2 to 5.5% in Q3. If so, there is every reason to suspect the New Zealand dollar will strengthen. When it comes to the GBPNZD rate, the caveat here is that the BOE will almost certainly announce an interest rate hike tomorrow. So trades will be prepping for that. 

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