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British Pound Backflips as Market Digests US CPI and Possible Fed Actions

British Pound Backflips as Market Digests US CPI and Possible Fed Actions

Daniel McCarthy, Strategist

British Pound, GBP/USD, Gilts, US Dollar, US CPI, Fed, USD/JPY - Talking Points

  • British Pound finds support on a change in tack by PM Truss and a weaker USD
  • US CPI put a cat amongst the pigeons with market reactions whipsawing positions
  • Inflation remains enemy number one. Will GBP/USD continue to gain in this context?

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The British Pound continued to rise through Asian trading today after a stellar rally in the North American session that saw the US Dollar come under pressure.

Prime Minister Liz Truss indicated yesterday that she might back down on tax cuts plans and Chancellor of the Exchequer Kwasi Kwarteng said that he is staying put despite the turbulence of the last few weeks.

This appeared to aid in the slide of Gilt yields and lent some support to Sterling.

Headline US CPI printed at 8.2% y/y against 8.1% forecast. An intriguing aspect was the core gauge that is now at a 40-year high of 6.6% y/y, which was above the 6.5% anticipated.

The core number could indicate that upward price pressures are spreading through the economy and broadening out. At the very least, the data suggests that the timeline for a potential pivot from the Fed has been pushed back.

The initial reaction to the data saw Treasury yields rise, US Dollar rally and equities sell off. Then once the news had been taken on board, the dollar and equities turned around while Treasuries ended up pretty much where they started the day.

USD/JPY made a 32-year high at 147.67 in the ruckus, which was only a squeak above the 1998 peak. There was no sign of the Bank of Japan in the currency market but they signalled that they will maintain their ultra-loose monetary policy.

The US Dollar is generally weaker so far today.

On Bloomberg television, IMF Managing Director Kristalina Georgieva weighed into the inflation discussion, highlighting the importance of price stability to enable long-term prosperity.

APAC equities followed Wall Street higher with Japan’s Nikkei 225 index up over 3.5% at one stage. Futures are pointing toward further gains for the S&P 500, Dow Jones and the Nasdaq 100 when their cash session opens.

Chinese PPI and CPI were also out today and came in slightly softer than forecast at 0.9% and 2.8% respectively y/y to the end of September.

Crude oil has mostly held onto overnight gains so far today with the WTI futures contract a touch above US$ 89 bbl and the Brent contract is around US$ 94.60 bbl at the time of going to print. Gold is steady near US$ 1,670 an ounce.

After Euro zone CPI this morning, attention will turn to US retail sales data.

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GBP/USD, 10- AND 30-YEAR GILTS

The chart below shows GBP/USD recovery against the easing of the yield in the 10- and 30-year part of the curve. As announced earlier in the week, the Bank of England will no longer be active in the long end of the Gilt market after today.

image1.png

Chart created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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