U.S. Dollar: Inflation Burns Bright

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The 'pivot' in the Federal Reserve's hiking cycle, and the Dollar rally, remains as elusive as ever after data confirmed U.S. inflation continues to run hot.

The Dollar was stronger across the board after it was reported U.S. inflation was stronger than the market was expecting in September, keeping alive expectations for further Federal Reserve rate hikes and diminishing the odds of a 2023 cut.

The headline U.S. CPI figure showed inflation rose 0.4% in the month to September, an increase on August's 0.1% and double the 0.2% gain the market was expecting.

Inflation rose 8.2% in the year to September, beating expectations for 8.1% but representing a slight lowering on August's 8.3%.

The all-important core CPI inflation figure was also bullish for the Dollar, coming in at 0.6% in the month to September, far hotter than the 0.2% gain the market was looking for the rate to remain unchanged on August.

Core CPI rose 6.6% in the year to September, above expectations of 6.5%. And the previous month's 6.3%.

"Couldn't have been a more hawkish U.S. CPI report," says Viraj Patel, Macro Strategist at Vanda Research. "Over to FOMC to see if they can calm markets from pricing in more hikes."

The Dollar rose sharply higher in anticipation of further rate hikes and a slip in global equity markets.

The Pound to Dollar exchange rate (GBP/USD), which had been riding high into the report owing to domestic developments, pared gains to 1.1180.

Against the Euro, the Dollar was up on the day by over half a percent, at 0.9656.

A look at the components of the inflation report reveals pressures remain broad-based, although there is some cooling coming from energy, commodities and used cars, which were at the forefront of the initial spike:

Image courtesy of @VPatelFX.

"US inflation continues to surprise to the upside," says economist Knut Magnussen at DNB Bank ASA. "This reading clearly supports another large move for the Fed in November and likely also in December. We still believe that a 75bp. hike at the November meeting is most likely, but we would not rule out an even larger hike of 100bp."

The 2-year Treasury yield has risen by around 25 basis points to 4.5% after the release while ten-year yields spiked to 4%.

The Dollar was higher against all its peers, apart from Sterling, and further gains are likely say analysts.

"Although the U.S. dollar has already appreciated significantly in recent days, partly due to the hawkish statements by FOMC members, I still see the risks on the side of a strong U.S. currency," says Thu Lan Nguyen, FX and Commodity Analyst at Commerzbank.

"This is because current inflation levels are so far away from the Fed's target that a decline would have to be dramatic for Fed officials to let up on their aggressive pace," she adds.