US inflation accelerated again in September, and the dollar moved up. The PCE and GDP growth reports came out on October 29 and were no weaker than forecast. Against this backdrop, the Canadian dollar lost ground.
PCE is the personal consumption expenditures index. It is the main inflation gauge for the Fed: the US central bank uses it to judge price growth.
This matters to traders for one reason. While inflation is high, the market expects tighter Fed policy and buys the dollar. All USD pairs move.
What did the data show?
- +0.5% month-over-month - headline PCE in September versus +0.3% in August.
- 3.6% year-over-year - versus 3.4% a month earlier.
- +0.3% month-over-month and 3.1% year-over-year - core PCE versus 3.0%.
- 3.4% - preliminary third-quarter GDP growth on an annualized basis versus expectations of 3.2%.
Core PCE is calculated excluding food and energy.
All PCE figures matched the forecast. But the direction is the same - up. A quarter earlier GDP grew 2.2%, while personal income and spending in September rose less than expected.
How did the market react?
USD/CAD reversed upward during the US session. The pair rose from an intraday low of 1.3970 to 1.4007.
- 102.25 - the DXY dollar index, which recovered the previous day's decline.
- above 158.00 - USD/JPY.
- just above $4,000 per ounce - gold.
- 0.7055 - AUD/USD after hot inflation in Australia.
Why is the dollar stronger?
- The Fed rate held steady. On October 28, the regulator left it at 3.75-4.00% by a vote of 10 to 2.
- A hawkish signal from the Fed chair. Kevin Warsh said inflation remains elevated.
- 83% odds of a hike in December. That is the probability the market is pricing in, according to CME FedWatch.
- The Bank of Canada's decision did not help CAD. On October 28 it raised the rate by 25 basis points to 2.50%, but this was already priced in.
- Oil under pressure. For the loonie, that is another negative.
Kevin Warsh, Fed chair: "Although overall financial conditions are tighter, I am not ready and cannot call them tight."
What's next?
- Friday, October 30. The Bank of Japan's decision; it raised the rate to 1.25% in September.
- December. Fed and Bank of Canada meetings - the next reference point for the dollar and the loonie.
It's worth keeping the dates handy. Both meetings are in the economic calendar, and you can pick a challenge for currency pairs in advance.
Caught this dollar surge - and what's left of it?
The move from 1.3970 to 1.4007 is 37 pips. On a deposit of a couple thousand dollars, such a candle gives you an amount you won't even notice, even with a perfect entry. On a notional of one hundred thousand, the same trade is already a noticeable gain. In prop trading, the trader passes the selection, while the company itself issues the trading account within its limits and shares the profit. It makes sense to understand the mechanics before the December meetings: the moves there will be bigger.