In recent developments, an unforeseen easing of tensions amongst the United States, Russia, and Ukraine has the potential to turn the tide in favour of the Euro. However, at present, Consumer Price Index (CPI) data assert dominant influence over market movements.
The foreign exchange market was notably tranquil, mirroring the calm before a storm, as traders cautiously awaited influential economic announcements. This cautious atmosphere reflected not a surge of confidence but rather a tactical preparation for potential volatility following the release of CPI figures. The anticipation surrounded the core CPI’s potential to exceed the market’s expectation of a 0.3% month-on-month increase.
Despite Bloomberg’s poll indicating a 0.2% increase on the headline and maintaining the 0.3% consensus for the core, the pattern of the recent CPI series has been notably underwhelming, with five consecutive months of results falling below expectations. The market had speculated on the impact of tariffs on these figures, but thus far, the results have shown more warning than actual effect.
Recent trade deals have mitigated the shock of the tariffs introduced on “Liberation Day” in April. A further alleviation was seen in the recent extension of the tariff truce between President Trump and Chinese leader Xi Jinping, pushing the potential escalation back and setting a new deadline of November 10. This respite hints at a forthcoming agreement, stalling the re-escalation of US tariffs on Chinese goods which would have increased to a daunting 54%.
In response, commodity currencies, like the Australian Dollar, showed little enthusiasm. After the Reserve Bank of Australia reduced interest rates by another 25 basis points to 3.60%, with Governor Bullock suggesting that further cuts would be contingent on incoming data. This monetary policy stance, aiming to preempt and respond to economic indicators, underscores the uncertain climate, capping the Australian Dollar within a narrow trading range.
The forthcoming release of the CPI data at 8:30 a.m. New York time is keenly awaited, with expectations leaning towards a 0.4% month-on-month increase for the core CPI. Such an increase could prompt a slight uptick in annual inflation rates, potentially injecting short-term strength into the USD. However, given the Federal Reserve’s view that tariff-induced inflationary pressures are temporary, even a higher than expected CPI may not divert the anticipated policy course.
The Euro to USD exchange anticipates volatility, with potential to dip below 1.16 in response to strong CPI data, whilst geopolitical uncertainties add to the market’s cautious stance. President Trump’s engagements with Presidents Putin and Zelenskyy have drawn particular attention, with the outcomes of these discussions having the capacity to influence market sentiment significantly.
Across the pond, the recent UK labour market data provided a sliver of optimism, with job losses and wage growth rates faring better than expected. This has invigorated sentiment around the British Pound, adding to speculation on the future direction of the Bank of England’s monetary policy.
In summary, the immediate outlook for the foreign exchange market is predominantly guided by the forthcoming CPI announcement. Should the data align with or exceed expectations, we may witness a temporary strengthening of the USD. Nevertheless, the overarching market direction remains ensconced within a web of geopolitical and economic uncertainties, with a keen eye on trade policies and interest rate decisions dictating medium to long-term movements.
