CPI May Keep Dollar Going

Impact on GBP: Eyes on MPC's Mann today

The main event in Sterling markets today is a speech by Bank of England’s Catherine Mann, the most hawkish member of the MPC. Markets will be attentive to any comments about the implications of the recent budget for monetary policy and any colour on the latest jobs/wage figures. Given her arch-hawkish stance, we suspect she could stress – if anything – the inflationary aspect of the government’s spending boost and perhaps focus more on the sticky wage figure rather than the rise in the unemployment rate in September.

Ultimately, the GBP curve does not need many more hawkish hints to move at this stage. Markets are pricing little to no chance of a cut in December, and only 50bp in total by September 2025. The risks remain skewed towards a dovish repricing and consequent negative impact on Sterling, although a repricing lower in rates may take some time to materialise as markets will tread carefully when assessing the inflationary implications of the budget. The soft momentum for the EUR means GBP/EUR could remain close to?€1.2048 or ￡0.8300 (the gravity line).

Speaker 09.45: MPC Member Mann.

Impact on EUR: EUR/USD at $1.0600 is in line with rate gap

EUR/USD has remained under intense pressure from a broad USD rally and may well make a move below $1.0600 today if the US core CPI comes in at 0.3% MoM. Despite the size of the recent EUR/USD drop, we must note that $1.0600 is the short-term fair value level implied by short-term rate differentials. The USD:EUR two-year swap rate gap has continued to widen rapidly, and is currently around 185bp.

In other words, there is not much additional risk premium being added to EUR/USD compared to what rates are suggesting, as markets are doubling down on expectations that the ECB will slash rates more than the Fed ahead of the tariff impact on growth.

According to ING Bank, they are?in the dovish camp with their ECB call and think markets are still underpricing (30bp) the chances of a 50bp cut in December.

The Eurozone calendar is quite quiet today and US news will drive EUR/USD. Some major Banks are calling for EUR/USD to target $1.0400 for year-end.

No Major Data.

Impact on USD: US inflation may stay too hot

The second round of post-election Trump trades has now taken the DXY dollar index to the 2022 highs as markets sink their teeth into the dual narrative of a wider rate and growth gap between the US and other developed countries. The latest news on the government appointment side is that Elon Musk and Vivek Ramaswamy will lead a “department of government efficiency”, which aims to slash bureaucracy and spending. It is too early to tell what this will effectively mean for public finances, but this confirms that Musk will play a key advisory role in the Trump administration, which likely fuels expectations for de-regulation and looser taxation.

The strong Dollar is currently pricing in a good deal of Trump’s policy mix, and data releases/dovish Fed comments might offer good opportunities to take profit in bullish Dollar positions. However, for today’s US inflation report, core CPI is expected to?keep rising at a consensus 0.3% MoM in October, and headline CPI at 0.2%.?

According to ING Bank,?they expect the CPI numbers?to make the Dollar rally and could find a bit more steam and DXY consolidate above 106. Nevertheless, the recent bullish move is starting to look a bit stretched, and the risk of a positioning-led short-term USD correction similar to the 7-November one is quite high.

Major Data 13.30: Core CPI m/m expected 0.3% unchanged, CPI m/m expected 0.2% unchanged and CPI y/y expected 2.6% from 2.4%.

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