Greenback is smashed on CPI miss, weak retail sales and a drop off in consumer confidence
The USD was once again on the backfoot on Friday night as core CPI missed forecasts posting 1.6% versus 1.7% expectations. The relative lack of inflation is undermining the market’s confidence in the Fed’s ability to maintain its tightening bias. The equity market rallied to new highs, which will create a headache for the Fed because the risk for asset bubbles remains elevated. Indeed, they may still want to tighten to take the heat out of asset prices. The policy gridlock in Washington is causing caution surrounding business investment decisions, which is in turn hampering economic momentum. However, Friday’s inflation numbers did see a marginal improvement in wages and with a tight labour market this is likely to be where inflationary pressures come from over the medium term. Tonight sees the core CPI release from the Eurozone with the market expecting a 1.3% headline number. Although economic conditions have improved significantly in the zone, we still expect inflation conditions to remain pretty benign. Most of the AUD pairs are approaching key levels of resistance so this could be a very interesting week in determining the medium term direction for the currency.
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