US dollar insensitive to inflation record (Daily analysis 14.10.2022)

Investors have been anticipating Thursday's US inflation data all week. The surprise in the form of a new record in core price dynamics cemented the (already virtually foregone) sharp Fed rate hike coming at the November 2nd meeting. However, it did not provide the impetus for a sustained dollar appreciation. On the contrary, the initial surge in the USD was quickly erased and gave way to a sharp correction. There is still quite a long way to go before the US currency's strengthening trend breaks down.

The US dollar: core inflation record sealed a sharp Fed hike

In September, US consumer price dynamics slowed from just 8.3 to 8.2% year-on-year. The index had reached a forty-year high of 9.1% year-on-year in June. Therefore, the easing of CPI inflation is proceeding at a snail's pace. This is the sixth consecutive month that US inflation has exceeded the 8.0% year-on-year ceiling. The persistence and momentum of price pressures are also reflected in the fact that, over the past year, the monthly jump in prices has turned out to be more modest than forecast only once, in July.

While producer price dynamics are slowly declining, year-on-year core price dynamics have set a new cyclical high at 6.6%. This is the highest reading of the index in forty years. In the last year, month-on-month core inflation has only twice risen by less than 0.5% (this time by 0.6%). Thursday's inflation data sealed a fourth consecutive rate hike of 75 bps and makes it likely that the Fed will raise the cost of money to a range of 3.75-4.00% at its meeting on November 2nd. The Federal Reserve will not lower its tone as long as there is no unquestionable turnaround in inflation and an evident deterioration in the condition of the labour market.

The dollar: the turnaround from the dollar is still corrective in nature

The road to this is very far. After all, the labour market is still in excellent shape, which cements high inflation. In September, the US unemployment rate fell to 3.5%, and wages were 5% higher than a year earlier. The gigantic pandemic employment loss of more than 20 million has been recovered at a record pace. The number of vacancies, although falling, still exceeds ten million full-time jobs.

The message from the US monetary authorities is clear: we will not make the mistake of prematurely abandoning a restrictive stance, and we are not thinking of cutting rates in 2023. As a result, in the coming weeks, there should be no significant room for the weakening of the dollar, which has been reigning for months undivided on the currency market. There is also no prospect of stock markets breaking out of their slump. Policymakers are aware that without a cooling labour market, suppressing inflation will not be possible, and they will sooner tighten policy too much than ease its course prematurely.

The dollar benefits from the Fed's policies as a safe haven currency and the financial system's foundation. It has also been the beneficiary of investors' flight from equities and bonds. The USD is also favoured by the US's leading position in oil and gas production. What is a strength for the dollar is a weakness for the euro and the zloty. The EUR/USD exchange rate, faced with the spectre of an energy crisis and the risk of a deep recession in Europe, should remain below parity in the near term; only its breaking through will mark the collapse of the trend of dollar dominance.