The most important economic report of the week, the US inflation data, was released earlier today. As it turned out, in October, inflation rose, but not as much as expected.
In other words, it is cooling down on all metrics while persistent. As a result, both headline and core inflation in October were lower than expectations, triggering sharp moves in financial markets.
First, the US dollar got sold aggressively across the board. Second, the US stock market rallied.
Disinflation (i.e., rising inflation but at a slowing pace) is what drives the dollar lower because it implies that the Fed will have to think twice before hiking as planned. After all, the interest rate hikes need some time to make their way into the economy, and this is the first sign that tightening works.
Hence, the Fed would not want to hike too much as a recession might do as much harm to the economy as high inflation. Therefore, traders sold the US dollar and it might just be the beginning of a prolonged trend.
EUR/USD rallied today but not as much as other US dollar pairs. Nevertheless, it jumped from below 0.9950 to the current 1.0170, and there is scope for some more.
Traders should remember that the EUR/USD pair was one of the favorite ones to short, given the war in Ukraine and the ECB lagging behind the Fed. As such, a short squeeze should not be out of the question.
AUD/USD is back at 0.66 and rising. The last inflation report in Australia surprised to the upside, and so the RBA might want to give a strong signal at their next meeting. An attempt to 0.63 or more might be in the cards until the end of the trading year.
NZD/USD regained the critical 0.6 level after the October US inflation data. Should the EUR/USD rally continue, then the NZD/USD would have no problem climbing above 0.63 or higher.
All in all, today’s inflation data from the United States is a game-changer. The Fed was the first to hike, so it should be the first central bank to react to inflation is cooling off.