Dollar on the back foot

Yesterday’s CPI data in the US showing a renewed fall in inflation in October clearly came as a relief to markets judging by the sizeable reaction that followed, with bond yields falling sharply, stocks rallying strongly and the dollar losing considerable ground. The latter shed the best part of two cents against the euro and sterling and is trading at around $1.0870 and $1.2470 respectively this morning, which in turn leaves EUR/£ little changed trading just north of 87p.

Post the US inflation numbers, the market now sees some chance that the Fed will start cutting interest rates as soon as March next year, which in turn has contributed to a marked decline in Treasury yields with 2- and 10-year yields both down around 20bps. This has also spilt over elsewhere, with German and UK 10-yields falling by about 10bps and 15bps respectively. Meanwhile, in equity markets, the S&P 500 gained almost 2% yesterday and European stocks added around 1.5%

The annual rate of CPI inflation in the US resumed its descent in October falling to 3.2%, a touch lower than the consensus forecast (3.3%) and down from 3.7% in October. The core rate – which excludes energy and food prices – nudged down for a seventh consecutive month to 4.0%, the lowest reading since May 2021. While still running above its 2% target, the Fed will be reassured by the continuing progress in lowering inflation.

In the UK , data released earlier this morning showed a sizeable – but not surprising – decline in headline CPI inflation, which fell to 4.6% in October from 6.7% in September. This was in line with Bank of England expectations and driven by a sharp fall in energy price inflation. Core inflation also fell last month to 5.7%, slightly lower than the consensus expected (5.8%) and down from 6.1% in September, with declines seen in both core goods and, importantly, core services inflation.

Economic data due over the course of today includes industrial production in the Euro area and retail sales and producer prices in the US.