In our FX review this week, we take a look at the large US inflation print and what it could mean for the US Dollar. We also discuss the impact of poor UK data on the pound, as well as the latest G10 trade opportunities.

Big US inflation print

The main focus this week centered around the US inflation print on Wednesday. In advance of the number, many weren’t expecting fireworks. The expectation was 5.8%, following the 5.4% figure previously. This would tie in with the general theme of rising inflation, but tying in to the thought that it’s still transitory in nature.

However, the figure came out at a huge 6.2%. Even when stripping out energy and food, it was still at 4.6%. This saw a USD bid, something that picked up pace on Friday, especially into the close.

The thinking here is that higher than expected inflation will force the US Fed to speed up the pace of tapering asset purchases off. The sooner this gets completed, the quicker it’ll be for an interest rate hike. This provides more demand for USD. 

Given that the Fed only met and outlined the tapering schedule the previous week, the impact of this won’t be seen for another few weeks until the Fed meet again. But for the moment, it adds another string to the bow for USD strength, and a reason why we like to be long USD against most pairs.

Looking to get long GBP

One pair that we think is a tactical buy at the moment against the USD is the British Pound (GBP). The pair has been grinding lower ever since we took profit on our last long trade at 1.3800 back on October 19th.

It tested October lows at 1.3425 last week, but managed to hold these to rebound back above 1.3500. However, a combination of the US inflation print and poor UK data allowed the pair to break this level. The lows were seen around 1.3365, but it closed the week higher at 1.3416.

In our latest trade, we’ve gone back long the pair at 1.3390. We feel that the pair is oversold. The bad news priced into GBP should ease, especially if the Bank of England do raise rates next month. For USD, we think momentum could wane in advance of the Fed next month. Ideally, we see the pair move higher in coming weeks, allowing us to either take profit or move up our stop ahead of central bank meetings in December.

Other points to note in the G10 space

Elsewhere, we do see pockets of opportunities but nothing to get too excited about. Both AUD and NZD are struggling to break ranges, particularly against USD. We think the RBA are more dovish than the RBNZ. However, a lot of the rate hikes are already priced into NZD. Therefore, any disappointment (such as we saw with the Bank of England), could see hard NZD depreciation. From a risk/reward angle, it doesn’t look attractive to enter right now.

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