Volatility spiked after US inflation data came out. EURUSD surged to 1.1567 but then came under pressure from the September CPI print.
The September consumer price index grew 5.4% YoY, up from 5.3% in August (vs. the 5.3% median consensus). Given that the report came out before the Fed minutes, traders initially reacted by buying into the dollar, while the 10-year UST yield increased slightly. It took about an hour before the market turned around abruptly.
The yield on 10-year Treasuries moved 3.8 bps lower to 1.542% by 4:10 ET. Gold gained from the decline in yields, climbing to $1,796/bbl. The euro recovered to 1.1593 and continued to push higher after the Fed minutes came out.
According to the September minutes from the Federal Open Markets Committee, released Wednesday afternoon, the Fed could commence the process of tapering its bond purchases as early as mid-November. The pace of asset buying is expected to decline by $10 bln per month in Treasury bonds and $5 bln in mortgage-backed securities.
Today’s macro agenda (GMT 3)
- 11:30 UK: BoE credit conditions survey
- 15:30 US: PPI (September), initial jobless claims; Canada: manufacturing sales
- 17:30 US: weekly petroleum status report
- 20:00 US: speeches by Richmond Fed President Tom Barkin and FOMC member John Williams
Current outlook
In Asia, major currencies have been trading in positive territory. Topping the leaderboard are the aussie and the kiwi. Growth in Antipodeans points to ongoing risk appetite.
AUDUSD gains were capped by mixed employment data in the country. The number of employed people fell by 138k in September, following a decrease of 146,300 in the previous month and an uptick in the jobless rate to 4.6% from 4.5% recorded in August.
Demand for sterling looks stronger than for the euro. Firming of the euro against the dollar is being held back by a downturn in the EURGBP cross pair.
Meanwhile, the EU released its plan for a reduction of post-Brexit checks on goods, which is positive news for the British pound. Northern Ireland has a special Brexit deal which keeps it in the EU's single market for goods and allows free-flowing trade with the EU. Furthermore, the BoE is expected to hike rates earlier than expected.
Market participants now await a new string of US macro data: producer price index (PPI) and weekly jobless claims. Richmond Fed President Thomas Barkin and Federal Open Markets Committee member John Williams will deliver speeches at 20:00. Both favor QE tapering.
Technical analysis
By the time of writing, EURUSD had retraced back above the 1.1600 handle. Buyers broke out of the 1.1577-1.1585 resistance. The road to 1.1640 (October 4 high) is now open. A further decline in the 10Y Treasury yield and a correction in the DXY index would be necessary for further gains. Acting as a hindrance is the EURGBP cross, which came under pressure from positive UK macro data and Brexit news. Closing the hourly candle below 1.1580 would bring bearish sentiment back to the market.
The next target for the UST10 is 1.50%. A rise in the long end of the yield curve is mainly due to the extension of the US government debt ceiling. To reverse the situation in the fixed income market, UST10 yields would need to consolidate below 1.45%.
DXY futures are trading near the support level at 94. If dollar selling picks up during the European session, the decline in the greenback will accelerate to 93.70.