US Inflation defies expectations of cooling -sending the dollar higher.

Market Bias: Hawkish/stronger

• Dollar starts last week with heavy losses only to set new highs vs. some currencies later in the week. Higher than expected inflation data and safe haven buying drive strength in USD.
• The US narrowly avoided a rail strike which could have cost the economy upwards of $2B/day.
• Bellwether transport stock, FedEx, issues profit warning sending equities lower. Portends for more earnings write-downs, more risk-off sentiment and more safe haven dollar buying.
• Risk to current market bias: Any indication by Federal Reserve that they would stop raising rates when Fed Funds hits 4% could send dollar lower.

Market Bias: Bearish/weaker

• UK CPI inflation data came in at 9.9%, a drop from last months 10.1% but core inflation rose to 6.3% from 6.2% the prior month.
• UK Retail Sales for August fell 5.4% after a 3.1% fall in July as consumer confidence turns negative for first time since the pandemic.
• Bank of England meets Thursday with markets split as to whether there will be a hike of 0.50% or 0.75%.
• Risk to current market bias: National mourning for Queen Elizabeth II will likely cause the UK to tip into a technical recession - after which consumer spending may surge.

Market Bias: Bearish/weaker

• The Federal Reserve is seen raising interest rates faster than the European Central Bank (ECB) creating a drag on the euros performance.
• The ECB’s Holzmann said inflation could remain at 3%-4% for the next 5 years.
• The European Union’s plans to intervene in energy markets and curb power consumption may provide support to the economy, however, the common currency still lags US dollar.
• Risk to current market bias: Parity with the dollar is proving a strong support level for the euro. Any positive news on the war, energy supply or the European economy could see investor sentiment turn euro positive quickly.

Market Bias: Bearish/weaker

• CAD weakened last week and this morning as a worse inflation/stagflation scenario emerged. CPI tomorrow could cause significant volatility in either direction.
• Expected economic slowdown and strong USD send the loonie toward 1.34. Market focus seems to have shifted from headline CPI to core CPI.
• The oil rally that helped support the loonie may have turned as weak economic indicators sap expected energy demand.
• Risk to current market bias: The Canadian central bank has led most other central banks with rate increases – they may talk very hawkish should tomorrow’s CPI come in hotter than forecast.

JPY     

Market Bias: Bearish/weaker

• The yen rallied last week after Finance Minister Suzuki won't rule out any one response – including FX market intervention, should weaker yen trend continue.
• Bank of Japan (BOJ) cap on 10yr JGBs at 0.25% results in pressure on yen.
• Tomorrow’s release of CPI for August forecast 2.9% up from last month’s 2.6%.
• Risk to current market bias: The BOJ meets Thursday - while stronger intervention to strengthen the yen seems unlikely it cannot be ruled out.

Market Bias: Bearish/weaker

• Yuan broke above 7 last week for first time in two years, but vs. basket of currencies the yuan is more stable.
• Chinese officials set daily fixing significantly stronger as a “warning” to investors not to bet against the yuan.
• China wants a stable currency coming into next month’s Party Congress where President Xi Jinping is expected to get an unprecedented third term.
• Risk to current market bias: Intervention into FX markets by governments seems to have taken place in Thailand and Korea last week. Could China do the same?