The US dollar, on the ropes for the past few days, came out swinging today and has posted sharp gains against all of the major currencies. In the North American session, EUR/USD is trading at 1.0012, down 1.12%. The euro could find itself below the symbolic parity level before the end of the day.
Dollar flies as US inflation higher than expected
Last week’s ECB rate hike of 0.75% sent the euro on a strong upswing, but the currency came crashing down today. The US dollar has rebounded after the August inflation report was hotter than expected. Headline CPI dropped to 8.3% YoY, down from 8.5%, courtesy of lower gasoline prices. Still, inflation was considerably higher than the market consensus of 8.0%. Investors were especially concerned about core CPI, which rose to 6.3%, up from 5.9% and above the forecast of 6.1%. The mood in the markets is the polar opposite after the July inflation report, which dropped unexpectedly and sent the US dollar sharply lower.
The latest inflation data have increased the odds of a 75 basis point hike at next week’s policy meeting, with the likelihood of such a move rising to 80%, up from 72% prior to the inflation release. Interestingly, there is now a 20% chance of a massive 100bp hike, with zero expectation of a modest 50bp increase.
Since the market euphoria after the July meeting, when there was talk of the Fed pulling a U-turn on policy, the markets have bought into the Fed’s message that it will continue to raise rates until there are clear indications that inflation has peaked and is moving lower. The markets are anticipating a terminal rate of 4-4.25%, which means there is some life still left in the Fed’s rate-tightening cycle, as the current benchmark rate is 2.50%.
- EUR/USD is testing support at 1.0152. Next, there is support at 1.0107
- There is resistance at 1.0257 and 1.0314