The United States Dollar is paring some of the heavy losses of the week this morning, recovering an average of a third of a percent across the G10.
PCE Deflator data, the Fed’s preferred inflation gauge, came in right on expectation across the board. On a monthly basis, inflation rose just 0.2% through July, and annually inflation rose 4.2%, a very slight uptick from last month but still in line with current expectations.
Today’s release has done little to change expectations from the Federal Reserve for the remainder of the year; there is still roughly a 50/50 chance of a hike by November, more likely to come then rather than in September. After yesterday’s Q2 GDP downward revision, the US no longer looks like it is massively outperforming its economic peers. Chinese economic woes continue to color the global risk scene red as well – the nation’s manufacturing activity contracted for a fifth straight month in August.
While bets on the Fed’s moves for the remainder of the year are largely unchanged, other central banks face a completely different task, a major driver of this morning’s repricing. Eurozone CPI this morning did show a slight downtick in core inflation across the region, but when coupled with GDP figures from a few of its nations, the ECB faces the tough task of reining in sticky inflation without pushing the region into a recession. The US is not facing warning signals like these, keeping the Dollar afloat against its peers.
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Pound Sterling followed the global trend this morning and slid roughly one-third of a percent against USD this morning as traders adjusted their expectations for the Bank of England’s tightening cycle. Chief Economist Huw Pill spoke this morning, saying there is a risk of the BoE “over-tightening” interest rates. This signals a shift in approach for the central bank – previously, traders priced in a terminal interest rate close to 6%, but now it appears the BoE may swing closer to the Fed’s “higher-for-longer” approach in the face of a rapidly cooling economy.
The single currency lost north of half a percent of ground against the Buck after Eurozone CPI showed a slight decline in core inflation, but price pressures remain worryingly high throughout the region. Two notable hawks from the European Central Bank both spoke this morning and highlighted very different concerns for the region’s economy. While Robert Holzmann sees one or two more interest rate hikes from the central bank, the real fireworks came from Isabel Schnabel, who highlighted her concern for economic growth. The ECB has struggled to present a united front as of late, and, as a result, it seems investors are losing confidence in its ability to mitigate the region’s economic woes.