The US Dollar Index declined 0.1% to 102.06 on Thursday, retreating from an 18-month high as traders scaled back expectations of an October Federal Reserve rate hike. According to The Economic Times, the dollar has given back most of the gains it made after Wednesday's hot inflation reading pushed it to an 18-month high. Against the dollar, the euro bounced 0.3% from an 18-month low to trade at $1.1187, while sterling strengthened 0.2% to $1.3224, recovering from a 13-month low. The US Labor Department data showed the core consumer price index was up 0.3% in September versus economist expectations for a rise of 0.2%, with annual inflation rising 2.6% above forecasts for a rise of 2.5%, while the headline rate rose 3.7%, also above estimates for a rise of 3.6%. Market pricing for an October Fed rate hike rose sharply to 50% on the back of the data, but cautious remarks from Fed officials led markets to pare back those bets.
A chorus of comments from Fed officials, including Vice Chair for Supervision Michelle Bowman and San Francisco Federal Reserve Bank President Mary Daly, said the central bank can wait for a clearer picture as the October 27-28 meeting nears, effectively prompting markets to pare back October hike bets. As reported by The Economic Times, Khoon Goh, head of Asia research at ANZ, said "Despite the whole CPI number coming slightly stronger than expected, I think markets have sort of taken the view that maybe it was not hot enough to force the Fed's hand for October." The yield on the US 10-year Treasury bond fell to a three-week low of 5.1267%, and the 30-year was at 5.4795%, with a rally in US Treasuries dragging the dollar lower. Sim Moh Siong, FX strategist at OCBC, wrote that "The USD rally lacked punch as the retreat in Treasury yields after an initial jump softened the rates impulse," adding that the return of the traditional negative stock-bond price correlation helped contain the dollar rally.
In the daily chart, GBP/USD trades at 1.3230, maintaining a bearish near-term tone as spot holds beneath the 20-period Exponential Moving Average (EMA) at 1.3290. As reported by Investing.com India, the pair's inability to reclaim this short-term EMA suggests that rallies remain capped for now, while the Relative Strength Index (RSI) near 39 hints at weak but stabilizing downside momentum. Stronger-than-expected like-for-like retail sales data from the British Retail Consortium and hawkish comments from Bank of England policymaker Megan Greene have previously supported sterling. Greene warned that second-round inflationary effects could emerge if the central bank fails to raise rates soon, while the U.S. dollar is seeing modest profit-taking, pulling back from an 18-month peak reached on Monday.
The US Labor Department is due to release CPI data for September, which is expected to have risen 0.6% month-on-month after increasing 0.4% in August, while annual inflation is seen accelerating to 3.6% from 3.4%. According to The Economic Times, the risk is the core CPI surprises to the upside because of strong consumer demand and higher costs, pushing up market pricing of an October Fed hike and the USD. The data will be closely watched as recent comments from Federal Reserve officials have signaled high concern about elevated inflation levels, with markets currently pricing in just a 19% chance of a Fed hike this month but still seeing around an 85% probability of an increase before the end of the year. The Fed is also due to publish its Beige Book for further insights into economic conditions.
Investors await UK monthly GDP data for August, which will be released on Thursday, with the UK economy expected to have contracted 0.1% after growing by 0.4% in July. According to Investing.com India, investors will also focus on Manufacturing and Industrial Production data for further insights into UK economic momentum. The IMF's upgrade to UK growth outlook, citing AI as a driver of stronger growth, comes despite energy shock concerns from the Iran war, with the IMF warning of further price rises and job losses and cautioning against state handouts ahead of the budget later this month.
