EM Market Report

US inflation to drop again?

Thanim Islam
Thanim Islam 13 September 2022

GBP: UK unemployment now at 1974 low

EUR: Euro hits a ceiling

USD: US inflation to keep falling?

Sterling

Sterling finished higher amongst the G10 currencies yesterday, with risk appetite still on the up on Ukraine’s counter offence against Russia.

GDP for July came in worse than expected, but nonetheless showed a rebound from the -0.6% print in June.

Today’s job reports showed that the UK job market remains relatively tight still. The unemployment rate dropped to the lowest since 1974 to 3.6%, and wage growth continued to accelerate higher suggesting that the Bank of England may need to keep on aggressively hiking rates, lifting chances of a 0.75% rate hike.

The fallout? Sterling remains well supported with GBPUSD getting to the highest since the 30th August.

Euro

Euro gains stalled versus the US dollar yesterday at key resistance levels of the 50-day moving average, as well as the upper channel of the 2022 downtrend (see chart of the day). Breach of these levels could be very key in terms of breaking this long term downtrend, so price action around these levels will be key to watch.

On the GBPEUR we saw markets reject the May 2021 low again, suggesting key support levels for the currency pair. Euro sellers to buy pounds should be eyeing up these levels should they have a requirement.

Markets continue to ride the positive risk appetite from last week, and the fall in gas prices also contributed. Natural gas prices fell on the EU’s plans to curb power consumption, and provide liquidity to energy markets to counter the threat of an energy crisis hitting the Eurozone.

German inflation came in at 8.8% for the month of August, matching the July print.

Later this morning the ZEW survey of economic sentiment will be released.

USD

The dollar continued to weaken over the course of the day, following the trend from the latter half of last week as equity markets continued to rally. On the dollar index we saw the 107.70 50% retracement level tested before retreating higher. A drop below this could continue further dollar selling.

Today’s focus will be on the August inflation print. The headline reading is expected to ease to 8.1% in August, from 8.5% on the back of falling commodity prices. The key data point will be the core inflation reading which strips out energy and food costs. The year-on-year print is expected to rise marginally to 6% from 5.9%, with the month-on-month print expected to come in at 0.3%.

Should the monthly figure come in as expected or lower, then we would expect US dollar selling to continue, i.e. GBPUSD and EURUSD higher. But, a monthly reading above 0.3% and we could well see markets buy back into the US dollar.

Chart of the day

EURUSD has been in a downtrend all throughout this year with a clear price channel. Last week's hawkish ECB rhetoric and optimism over Ukraine's counter-offensive against Russia has caused the euro to bounce back over the last few days, with the EURUSD hitting key resistance levels within this downtrend channel.

Today's inflation figures from the US could well prove to be key in the euro breaking out of this downtrend.

13092022 cotdSource: Bloomberg Finance L.P.

Market rates

Today's Interbank Rates at 09:13am against sterling movement yesterday.

Euro

€1.155

US dollar

$1.172

Australian dollar

$1.701

South African rand

R19.96

Japanese yen

¥166.8

Have a great day.