FX Market View #32 Dollar extends its Rally following high US CPI data

Inflation data reported on the high side in the US with the release of the October CPI numbers, extending the Dollar’s rally over the weekend. The impact this had on other financial markets saw elevated volatility levels in bond markets, as well as unsettled trading patterns for US equities. Across the Atlantic, European equity markets had also struggled at the end of last week, however interest rate benchmarks did find support. Consequently, the Euro was sold to fresh lows of the year as the common currency struggled against the Dollar. When analysing the other currency majors, both the Yen and Sterling traded lowered. However, the decline was largest amongst the Scandinavian currencies with the Swedish Krona leading the largest losers.
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Since the release of the US CPI data last Friday revealing that headline inflation is above six percent, the Fed needs to respond with different measures. However, the key limitation which reduces the Fed options relates to the pace of tapering. The response to the inflation news on the currency majors was an immediate influx of support for the Dollar across the board. As a result, yearly highs against the Euro and Sterling were established with few signs of this trend reversing. Looking at the technical picture, the common currency will first find support at levels last traded 16 months ago. The Australian Dollar is also weakening against the US counterpart. The months ago the Aussie posted the low of the year against the Dollar, and can likely revisit these levels again.
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Looking into the week ahead, the market focus on data releases will move away from inflation data to US manufacturing and retail data. However this week it might be that the geo-political developments will have the bigger impact on the markets. For example, the building tensions along the Poland-Belarus boarder may contribute toward uplifting risk appetite. The Dollar has softened but this has not developed into any signs of a reversal any time soon. Therefore the short term bounce made by the Euro and Aussie, lack the conviction of a path to recovery. Only emerging market currencies are showing signs of a sustainable rally against the Dollar. Global equities appear to find their footing again, with European bourses being the standouts.