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US Dollar Trades at a 16-Month High against the Euro as Inflation Data increases Chances of a 2022 Rate Hike

The US Dollar rallied on Thursday and touched its strongest levels against the Euro in 16-months following higher than expected Consumer Price Index (CPI) Data on Wednesday. The CPI topped 6%, resulting in rises in US treasury yields and speculation that the Federal Reserve (Fed) may pick up the pace on tapering asset purchases. The Fed’s preferred indicator is the core inflation rate, which excludes food and energy prices. Core inflation was reported to have increased to 4.6%, the reading shows inflation is at its quickest pace since June. The pace of inflation rates sparked the largest sell-off in (short-term) US government debt since the global market turbulence in March 2020. Fed Chair Jerome Powell recently stated that some aspects of overall inflationary pressures remain ‘transitory’ and will subside in mid-2022. However, yesterday’s reading will increase pressure on the Fed to tighten monetary policy sooner. Market expectations of the first US interest rate rise have moved from 2023 to the middle of 2022.

Today, markets will focus on the release of the University of Michigan’s Consumer Sentiment Index. The consensus forecast for an increase from 71.7 to 72.5 in November, although that would still be below levels reported during the first half of the year.

2022 Inflation Forecasts Revised to the Upside

The European Commission released its Economic Forecasts yesterday, which saw 2021’s Gross Domestic Product (GDP) growth revised up to 5% from 4.3%. Brussels now predicts 2022’s GDP growth to read 4.3% from an initial forecast of 3% last year. Aside from GDP, CPI inflation forecasts for 2021 were also revised to the upside to 2.4%, 2022’s CPI is predicted to be at 2.2% and 2023 will drop below the 2% target to 1.4%. Looking at currency impact, it was relatively limited for the Euro.

Looking ahead to today, it is another quiet day for Eurozone Macro-Economic Data. We have seen the release of the European Industrial Production month-on-month (MoM) figures this morning which is expected at -0.5%.

Sterling Continues to Trade Near an 11-Month Low against the US Dollar following Mixed UK Economic Data

The Sterling remains subdued against several major currencies including the US Dollar. The pair traded at its lowest level going back to December 2020 and following September’s UK GDP Data on Thursday. The release of GDP data on Thursday reported that the economy grew at a monthly increase of 0.6% and a rise of 1.3% quarter over quarter (Q/Q) for Q3. The print was slightly below consensus for 1.5% and significantly lower than 5.5% in Q2. A slowdown in the pace of growth in the second half of the year was expected as the boost from economic reopening in services in Q2 would not be sustained. However, there is widespread evidence that supply bottlenecks are hampering the ability of many businesses from meeting strong demands, slowing the pace of economic recovery. Industrial output also unexpectedly shrank in September, adding pressure to the Sterling following the decision of the members of the Bank of England (BoE) to keep UK interest rates on hold last week, while signalling risks to economic growth as a priority.

There are no major UK data releases on the economic calendar today, although BoE MPC member Haskel is scheduled to speak later in the day.

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