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Minneapolis Fed President Neel Kashkari said yesterday, "I've said publicly that I could easily see us getting into the mid-4%s early next year."

"But if we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping at 4.5%, or 4.75% or something like that," he added. "We need to see actual progress in core inflation and services inflation and we are not seeing it yet."

"That number that I offered is predicated on a flattening out of that underlying inflation," Kashkari said. "If that doesn't happen, then I don't see how we can stop."

September’s CPI inflation prints will be closely watched in Canada on Wednesday at 12:30 GMT. Analysts estimate a third consecutive month of diminishing inflation, but that might not necessarily be enough to push additional rate hikes out of scope. Retail sales will be the next highlight on the calendar on Friday, but don't expect any fireworks here either.

Inflation to ease but stay uncomfortably high

The Bank of Canada has raised interest rates incredibly fast by 300bps since March and perhaps the latest softening in inflation data could be a product of its aggressive tightening. However, despite the fast pace and size of monetary tightening, the impact on inflation has been negligible so far and the BoC’s 1-3% target remains some distance away, raising fears of an entrenched inflation phenomenon.

The headline CPI is expected to ease to 6.8% y/y in September from 7.0% previously and 8.1% in July. However, the BoC chief Tiff Macklem has already clearly dismissed any pivot scenarios, reinstating the central bank’s objective of cooling inflation towards its 1-3% range target, even if concerns are mounting for a recession next year.

How big will the next rate hike be?

The central bank’s latest business survey for the third quarter added to the above worries on Monday, showing the biggest contraction in business sentiment since the pandemic and weakening demand forces, especially in the housing market. Even more striking was the fact that inflation expectations remained elevated despite softening a bit. Hence, with consumers and businesses remaining uncomfortable with the inflation picture, the BoC will probably deliver another rate hike at its next policy meeting on October 26.

The next question that arises is how big the next rate hike will be. Futures markets are currently foreseeing a smaller 50bps rate hike for October and a similar action for December, which might reflect a careful consideration of the household debt burden. The outlook for 2023 is rather uncertain amid fears of a potential economic slowdown, with analysts seeing just a modest rate increase at the start of the year.

What could revive loonie bulls?

Yet, an upside surprise in the CPI data, and more importantly in the core measures, could easily delay an anticipated slowdown in the pace of rate increases, likely bringing the case for a 75bps rate hike back on the radar. Consequently, with the US dollar lacking any fresh impetus so far this week, the loonie could recoup some lost ground. Specifically, dollar/loonie could head for the 1.3600 level. However, a move below 1.3500 could be more meaningful in terms of changing the market trend.

Otherwise, a weaker than expected inflation print could barely affect the BoC’s policy decision, leaving the loonie unaffected near its recent lows against the greenback. Retail sales for August, although expected to recover a large part of July's significant decline on Friday, may also prove insufficient to boost the loonie as long as the labor market keeps supporting consumption.

Key Highlights

• USD/CAD corrected lower from the 1.4000 resistance zone.
• A key rising channel is forming with support near 1.3680 on the 4-hours chart.
• Crude oil price is moving lower and might dive below $80.
• The Canadian CPI could increase 6.8% in Sep 2022 (YoY), down from 7.0%.

USD/CAD Technical Analysis

The US Dollar gained strength above the 1.3500 resistance against the Canadian Dollar. However, USD/CAD failed to continue higher above 1.4000.

Looking at the 4-hours chart, the pair formed a top near the 1.3977 level. It started a downside correction below the 1.3900 level. The pair declined below the 50% Fib retracement level of the upward move from the 1.3503 swing low to 1.3977 high.

However, the pair found support near the 1.3680 zone and the 100 simple moving average (red, 4-hours) or the 61.8% Fib retracement level of the upward move from the 1.3503 swing low to 1.3977 high.

There is also a key rising channel forming with support near 1.3680 on the same chart. If there is a downside break, the pair might decline towards the 1.3500 support or the 200 simple moving average (green, 4-hours).

On the upside, the pair is facing resistance near the 1.3800 level. The next major resistance is near the 1.3850. A clear move above the 1.3850 level might send the pair towards the 1.3920 level. The next major hurdle could be near the 1.4000 level.

Looking at crude oil price, there was a steady decline below the $85 support and the price might even decline below the $80 support.

Economic Releases

• UK Consumer Price Index for Sep 2022 (YoY) – Forecast +10%, versus +9.9% previous.
• UK Core Consumer Price Index for Sep 2022 (YoY) – Forecast +6.4%, versus +6.3% previous.
• Canadian Consumer Price Index for Sep 2022 (MoM) – Forecast 0%, versus -0.3% previous.
• Canadian Consumer Price Index for Sep 2022 (YoY) – Forecast +6.8%, versus +7.0% previous.

• AUDJPY reversed from key support level 91.00
• Likely to rise to resistance level 94.70

AUDJPY currency pair recently reversed up with the daily hammer from the key support level 91.00 (which has been reversing the price from the middle of May) standing near the lower daily Bollinger Band, support trendline of the daily up channel from September and the 50% Fibonacci correction of the upward impulse from February.

The upward reversal from the support level 91.00 started the active medium-term impulse wave (3).

AUDJPY can be expected to rise toward the next resistance level 94.70 (top of wave B from the start of this month).

Markets

Most markets built on yesterday’s moves in a rather dull trading session today. European stocks (Eurostoxx 50) added another 1.8% after taking out a first resistance level around 3451 (July 2020 interim high) shortly after the open. US equities go even further gaining more than 2% after big, 3%+ gains yesterday (Nasdaq). The jury’s still out but such large, countertrend moves have an awful lot in common with bear market, aka sucker, rallies. US Treasuries trade choppy. US yields lost a few bps in Asian dealings. A recovery attempt in European dealings (US 10y briefly topped 4% again) failed quickly. German Bunds’ trajectory was simply a copy paste of that. It suggests that interest rate markets for the time being are in a consolidating mode as they await crucial input from the likes of the ECB next week and the Fed/Bank of England early November. Current yield moves range between -1 bps and -5.3 bps with the belly outperforming in the US. German bond rates in a trade a tight range between -2 and +2 bps. Moves in European swap yields are larger (-3.4 bps to -6.7 bps). UK gilts came under slight selling pressure after surging yesterday when the Bank of England said this morning’s FT report was in accurate. In it, the business newspaper said the UK central bank would further delay active gilt sales from its balance sheet beyond October. UK bond yield changes briefly turned positive but trade conviction was low and momentum faded quickly. The curve currently sheds up 3.1 to 6.4 bps at the middle and long segment. Economic data was limited to the German ZEW indicator, which came in mixed. Expectations marginally improved from lowest level since 2008 at -61.9 to -59.2 vs consensus fearing a further deterioration to -66.5. The current situation reading tumbled to the lowest since mid-2020 (-72.2).

The dollar started on softer footing this morning and that remained the case for much of the session. For the trade-weighted index, this meant edging lower towards the lower bound of the upward trend channel. It came close to a test. DXY is currently narrowly losing the fight with the 112 barrier. EUR/USD ekes out a marginal gain but is still some way of first meaningful resistance at 0.995. The British pound already gives back part of the gains following the UK government’s embarrassing U-turn. EUR/GBP settles above 0.87. Cable (GBP/USD) has a generally softer USD to thank for limiting losses. The pair is hovering around opening levels of 1.133. The kiwi dollar is the notable outperformer in the G10 area today. This morning’s Q3 inflation printed eased way less then hoped-for, keeping pressure on the Reserve Bank of New Zealand to hold on to a strong tightening pace. But despite a strong performance today, at NZD/USD 0.57 is still trading weak from a historical point of view.

News Headlines

At a conference in Sydney, deputy governor Michelle Bullock indicated that Reserve Bank of Australia will likely continue to raise the policy rate further over the coming months even as the RBA earlier this month unexpectedly slowed the pace of rate hikes to a 25 bps step (2.60%). According to Bullock the slowdown compared to other central banks was due to domestic factors. At the same time, the RBA policy rate trajectory also was assessed to be steep(er) compared to other central banks. According to Bullard the high frequency of RBA meetings also allows the bank more frequent evaluation of evidence if necessary. Even so, Bullock indicated that RBA was concerned on the impact of previous rate hikes on household spending, a worry that also emerged from the RBA minutes published this morning. The Aussie dollar yesterday and today joins the broader correction of the dollar. At AUD/USD 0.6335, the Aussie dollar tries to rebound off the cycle low near 0.617 touched last week.

The Central Bank of Turkey announced new measures to support lira deposits and raise the cost of holding deposits in foreign currency. The bank raised the security maintenance ratio for foreign exchange deposits to 5% from 3%. At the same time, the Bank also requires banks with less than 50% of lira deposits to hold an additional 7% of bonds from the start of 2023. The move is seen as a step in the liraization approach of Turkish authorities. Despite the measures, the lira is losing modestly ground against the euro today, trading near EUR/TRY 18.35.

Despite all the attention on the mini-budget and the political fallout, the BOE still has to fight rising inflation. It will meet two weeks from now to decide on the next course of action. With the release of the data tomorrow, markets can get back to considering concrete data points and the evolution of monetary policy.

More immediately is the release of EuroZone inflation data because the ECB meets next week. There has been a flurry of commentary from MPC members ahead of the blackout period, with somewhat contradictory statements about just how far the central bank will raise rates. Hawks have moderated their positions, while doves have said that the rate hiking is far from over. Inflation data could be the deciding factor here.

What to look out for

First to announce is the UK, which comes out with a barrage of data just before the market open, as usual. Headline UK inflation is expected to tick back up to 10.0% from 9.9%, which would be just one decimal away from the recent high of 10.1% in July. Given the tight range of recent results, a relatively small miss from expectations could have an outside impact. That's aside from the psychological effect of the inflation rate returning to double-digits.

Naturally if inflation comes in just two decimals above expectations, it would beat the prior high. That could affirm worries that the peak hasn't been reached yet (something the BOE has already warned about). On the other hand, a miss of two decimals would show a continuation of the downward trend over the last three months and provide some relief to the markets.

The underlying figures that matter

The BOE focuses more on the Core inflation rate for policy decisions, and that is expected to continue its recent trend higher at 6.4% compared to 6.3% in August. Expectations that the UK is not out of the woods in terms of price increases is expected to be affirmed with PPI output remaining at 13.7%.

Across the channel, the situation in the EuroZone is expected to show increased justification for tighter policy. The annual inflation rate is expected to be confirmed at double digits for the first time since the currency was adopted, at 10.0%, up from 9.1%. That is driven by an acceleration of the monthly rate to 1.2% compared to 0.6% in august.

The outlook hasn't changed much

EuroZone core inflation rate is expected to be confirmed at 4.8% compared to 4.3% prior. The rise in prices is seen primarily as a product of higher energy costs filtering through the economy. If prices aren't rising primarily because of monetary policy, it's hard for monetary policy to control the increase and stabilize prices.

Earlier today it was reported that the BOE would delay the implementation of QT (selling gilts) due to market conditions. The low interest rates in the Eurozone are creating a similar problem, where investors are keeping to the sidelines ahead of expected economic turmoil. This makes policy tightening even more challenging, even as inflation continues to rise. Therefore, it's likely that a consensus ahead of the ECB's decision might not solidify.

The USD is coming down as stocks pushed higher during the US session yesterday. However, the 10 year US yields are consolidating so we have to consider that the USD can see some more intraday strength if 10 year breaks above 4%. If USD would come higher then watch for USDJPY as this one can move up to 150, within current impulsive uptrend. However, buying USDJPY here can be risky as Japan warned Tuesday of "appropriate" action to counter excessive volatility in the currency market after the yen hit a 32-year low against the U.S. dollar amid jitters over further possible intervention and its impact on the economy.

On the other side of coin, the USD weakness may resume vs the EUR while DAX is moving higher. We see index trading at the highs of the day, so EURUSD may try to catch it up after the pair retested the previous highs, it was new support for wave four. As such, we are looking for further upside into a fifth wave while pair trades above 0.9769.

GBP/USD has edged lower today, after starting the week with sharp gains. In the North American session, GBP/USD is trading at 1.1334, down 0.18%.

Pound jumps after Hunt axes tax cuts

The pound continues to show strong volatility as the political saga continues in the UK. Truss finally stopped blaming the markets and “global headwinds” for the decline of the British pound and UK gilts on Monday, saying she was sorry for going too “far and too fast” with her economic plan. Truss has insisted she will continue on as leader, but the restless Conservatives, who have sunk in the polls, could decide to pull the plug on Truss’ disastrous leadership.

Jeremy Hunt, the new finance minister, wasted no time in abolishing most of the tax cuts contained in the recent mini-budget and told parliament that spending cuts and tax increases were coming, an astounding U-turn. Hunt scaled back the plan to cap energy bills for consumers and that could mean higher inflation. The markets liked what they heard and the pound soared by 1.5% on Monday. Still, the soft economic outlook and the political chaos which has rocked the UK are strong headwinds which will likely weigh on the pound .

The UK releases CPI for September on Wednesday, which is expected to edge higher. Headline inflation is projected to hit 10.0%, up from 9.9%, and core CPI is forecast to rise to 6.4%, up from 6.3%. With no sign of inflation peaking, the Bank of England remains under pressure to continue raising interest rates at the November 3^rd meeting. Goldman Sachs has downgraded its UK growth outlook, with the economy expected to decline by 1% in 2023, worse than the previous estimate of -0.4%.

GBP/USD Technical

• GBP/USD faces resistance at 1.1373 and 1.1455
• There is support at 1.1214 and 1.1085

The US 100 cash index rebounded from 11035 last Thursday, with the recovery accelerating this week. That said, the index remains well below the downside resistance line drawn from the high of December 28, as well as below all the plotted exponential moving averages, which keeps the broader outlook negative.

The RSI and the MACD point to weakening downside momentum, which means that some further recovery may be on the cards before the bears take the upper hand again. The former rebounded from near 30 and is now approaching its 50 line, while the latter is lying within its negative territory, but above its trigger line, pointing up.

The bears could regain control from near the high of October 6 at 11655, or even from slightly higher, near the 12050 zone. If so, they could dive all the way down for another test at around 11035, the break of which would confirm, not only a lower low, but a new 28-month low as well. The next zones to consider as potential support areas may be at around 9740 and 9370, marked by the lows of June 29 and 15 respectively.

On the upside, a break above 12665 may be needed before all the bulls get off their couch. This could confirm the breach of the aforementioned downside line and may see scope for advances all the way up to the 13720 barrier, marked by the high of August 16. If investors are not willing to stop there, then we may see them shooting for the 14300 area, marked by the highs of April 20 and 21.

Recapping, US 100 has been in a recovery mode lately, but the bigger picture still points to a downtrend. Therefore, even if there are some more advances in store, the bears could very well recharge soon and aim for a new 28-month low.