American FX Outlook: Stubbornly low inflation poses risk of Fed turning dovish

What you need to know

  • The US dollar trades broadly lower against the majors as concerns about the US inflation derailing Fed from rate hikes come into play.  
  • The UK wages rose 2.2% y/y and unemployment remained at a 42-year low, but the number of lost jobs rose to 225K putting pressure on the Bank of England potentially making it even more dovish.
  • The US retail sales are expected to remain unchanged in October, but the core group added to GDP is seen rising 0.4% m/m.
  • The US CPI is seen rising 0.1% m/m, but decelerating to 2.0% over the year. The core inflation is seen dwelling at 1.7% y/y.

Wednesday’s market moving events

  • The US Empire State manufacturing index is set to decelerate to 26.0 in October.
  • The US retail sales ex-auto are expected to rise 0.2% m/m in October after rising 1.0% in the previous month
  • The US CPI is expected to rise 0.1% m/m, while inflation is expected to decelerate to 2.0% y/y. Core inflation is expected to rise 0.2% m/m and 1.7% y/y.

Major market movers

  • EUR/USD is the winner of the day, rising more than 1% to above $1.1800 region after very solid GDP growth in Germany and the Eurozone.
  • The US Dollar is losing steam on Wednesday as the decelerating inflation in the US is seen derailing Fed from rate hikes, including December move.

Earlier in Asia/Europe

  • Japan’s GDP rose 0.3% q/q while rising 0.1% y/y.
  • French EU norm inflation rose 0.1% m/m while rising 1.2% in October.
  • The RBA Deputy Governor Luci Ellis was giving a lecture on internal sources of growth like innovation and technology.
  • ECB's Hansson said that there is a scope for some prudent recalibration of ECB policies due to a stronger economy and the output gap closing relatively quickly. The ECB Governing Council can't make the stance on policy just dependent just on asset purchases, as “we are not looking only at that. We feel more and more confident Euro zone inflation will reach desired levels.” According to Hansson, waiting too long with reducing stimulus can be much more disruptive as you have to play catch-up.
  • Chicago Fed president Charles Evans sees 3-4 years before the US gets to point where Fed balance sheet is closer to normalizing.
  • ECB's Angeloni said there is a plan of presenting the considerations to address the existing stock of NPLs by the first quarter of 2018. The proposal will include appropriate backstops and adequate transitional arrangements for banks. 
  • ECB's Praet said that the residual monetary support needed to assist the economy in its transition to a new normal will increasingly come from forward guidance on our policy rates.

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