Dollar Mildly Bid in Muted Trade

Market Drivers October 17, 2017
Dollar stronger across the board
UK CPI misses MPC members tilt dovish
Nikkei 0.38% Dax 0.04%
Oil $52/bbl
Gold $1289/oz.

Europe and Asia:
GBP UK CPI 2.7% vs. 2.7%
EUR GE ZEW 26.7 vs. 34.2
EUR EZ CPI 1.5% vs. 1.5%

North America:
USD IP 9:15

The dollar was stronger across the board on the second trading day of the week in the FX market, but the moves remained muted as low volatility was the persistent theme.

The pound was one of the weakest majors as UK inflation came in slightly cooler than expected. UK core CPI printed in line at 3.0% but PPI data was 2.5% versus 2.6% eyed. According to ONS, “Food prices and a range of transport costs helped to push up inflation in September. These effects were partly offset by clothing prices that rose less strongly than this time last year.”

Nevertheless, the headline inflation rate hit a five year high and may put pressure on MPC to hike rates before the year-end, although MPC members testifying in front of Parliament today were reluctant to commit to any policy tightening at this time. The BoE policymakers are torn between the need to curb inflationary impulses in the economy, while at the same time providing enough accommodation for growth. At present, the slow pace of wage growth in UK means that real wages have actually contracted by -0.9% and any tightening of monetary policy would only exacerbate the pressures on aggregate demand.

Elsewhere, the North American calendar is barren for the second day in a row with only Industrial Production on the docket and FX is once again likely to be driven by fixed income flows and any geopolitical news that hits the screens. With 10-year yield above the 2.30%, USDJPY has now found firm support against the 111.50 level, but the pair remains capped ahead of 113.00 level and will need a sustained rise in yields to challenge that figure. For now, the price action continues to trade within very narrow ranges as markets remain in a state of equilibrium,