Overnight Headlines

*US stocks fell after +6% US CPI, Tech worst hit

*USD hit 15-1/2 month high, EUR below 1.15

*Gold jumped to a five-month top at $1868

*Vix touches highest level in nearly one month

*UK 3Q GDP +1.3% vs 1.5% expected (prior 5.5%)

US equities finished lower with defensive and large cap stocks outperforming. The S&P500 slipped 0.82%, its worst day in more than a month. That marked the first back-to-back decline in a month, after the index closed at a record peak to start the week. Asian markets are mixed with Japan rising supported by the yen’s weakness. European futures are lower while US futures are mixed.

USD smashed through recent highs, touching 95 on the DXY this morning. This level was last seen in July 2020. EUR fell through support at 1.1513. GBP/USD is currently trading at recent lows and support at 1.3411. USD/JPY moved back above 113.25 into the previous range. The selloff earlier this week now looks like a false break out. AUD is nearing 0.73 after weak job numbers this morning (-46.3k versus +50k expected).

Market Thoughts – Team Transitory no more

We had a big upside surprise in US CPI data yesterday. Core inflation rose 0.6% m/m. This took the annual rate to a new high of 4.6%, the highest since November 1991. There are many stats now flying around as to the non-temporary nature of CPI. The Atlanta Fed produces figures on flexible and “sticky” inflation. Prices of some products adjust quickly. Others take months, are hard to reverse and are what central bankers want to avoid. Last month saw the sharpest rise in “sticky” prices since January 1991.

The market is now pricing in three 25bp rate hikes next year. The first one is priced in July. This has been brought forward from September, before the data was released. The dollar strengthened significantly, especially against the low yielders like EUR and JPY which we have written about previously. The narrative from Fed officials didn’t change last night, but they may have to act sooner rather than later regardless.

Chart of the Day – EUR/USD breaks down in line with 5-month downtrend

FX volatility had been fairly subdued recently after last week’s central bank meetings. But all that changed yesterday. The CPI data offered more ground to Fed hawks. It also showed the big differences in the US and eurozone economies. And the potential outlook of central banks towards policy normalisation.

EUR/USD finally broke to new lows for the year after consolidating above 1.15 for a few weeks. The constant failure around 1.16 warned of further weakness. Support now becomes resistance around 1.1513/24. The March 2020 spike high is at 1.1495. and the halfway point of the March 2020 to January 2021 move is at 1.1492. Long-term levels below are 1.14 and then 1.1366. The weekly close will be important for more downside.