US October inflation came in above forecast, and the market no longer doubts a Fed rate hike on December 9. The EUR/USD pair consequently fell below 1.1200.
CPI is the consumer price index, the main measure of inflation in the country. CME FedWatch is an estimate of the probability of a Fed decision, calculated from rate futures prices.
The euro lost 0.28% over the day and is trading around 1.1190. For the trader, the backdrop has changed: the dollar is rising against all major currencies, and the main calendar point is now the December Fed meeting.
What did the statistics show?
Prices accelerated more than expected. CPI added 0.4% for the month against a forecast of 0.3%, versus 0.6% in September. Core inflation - 0.3% instead of the expected 0.2%, the same as a month earlier.
Core inflation is calculated excluding food and fuel: this reveals sustained price growth.
- DXY - rose 0.3% to 102.00
- USD/JPY - returned above 158.00 on weak Japanese household spending
- Gold - approached $4,000 after the release
- AUD/USD - holding just above 0.6900
DXY is the dollar index against a basket of currencies.
Why is the rate heading up?
- Futures rates. The probability of a 25 basis point hike on December 9 according to CME FedWatch is 99% versus 84% a day earlier. The target range will move to 4.00-4.25%.
- Reuters poll of November 6-10. All 101 surveyed economists expect a hike: 56 consider it the last in the cycle, 45 expect at least two more.
- A voice from the Fed. Christopher Waller, a member of the Fed Board of Governors, supports the December 25 points. He allows discussion of 50 if core inflation remains at 0.3% per month.
What is weighing on the euro?
The euro has its own weights. Philip Lane, chief economist of the ECB, called a December hike in the eurozone reasonable under unchanged conditions. He expects inflation at the end of the year slightly above 4%.
- 145 b.p. - the spread between 10-year French and German bonds, versus 175 at the October peak
- Budget disputes in Paris - continue to drag the pair down
The spread is the market's price for French political risk.
Which levels matter?
Chart reference points. The 100- and 200-period averages on the 4-hour are 1.1196 and 1.1227, denser above at 1.1275. Support runs around 1.1100.
Key point: as long as the market is confident in a hike, the initiative belongs to dollar buyers. The next point is the Fed meeting on December 9, whose date is convenient to keep in the economic calendar.
There is almost a month until the meeting. This is time to calmly sort out the rules of news trading and pick a challenge to suit your style.
Were you in the euro at the moment the figure came out?
The half hour after the release decides the whole trading day. Some added to the dollar, some waited for a pullback to 1.1200. On a prop company account, a second layer of conditions is added: a volume limit at the moment statistics are released, a ban on entering a few minutes before it, its own way of calculating the daily loss. For forex programs these points diverge more than the profit share. There is almost a month until December 9, a convenient time to check them on a calm market.