Dollar slips from 18-month high as Fed hike bets fade
After hot US inflation data the dollar eases as Fed officials urge patience. EUR/USD recovers to 1.12. Our analysis.
Key Takeaways
- The US dollar index slips to about 102.03, just below the 18-month high hit a day earlier.
- Fed officials are pushing back: an October rate hike looks less certain again.
- The Fed meets on October 27-28; EUR/USD trades near 1.12.
On Wednesday the dollar stood at a level it had not seen in a year and a half. A day later, part of that strength has faded: the dollar index sits around 102.03, and the euro has recovered to roughly $1.1216.
Fed voices take the wind out of the dollar's sails
The pullback comes even though the inflation data was, on paper, supportive for the dollar. At Finanzmarktwelt, Markus Fugmann notes that consumer prices for September rose 3.7 percent year over year, up from 3.4 percent the month before. Core inflation stands at 2.6 percent, a touch above the 2.5 percent forecast. Compared with August, prices rose 0.6 percent overall and 0.3 percent at the core.
Markets first reacted as expected. According to Fugmann, yields on ten-year US Treasuries jumped nine basis points to 5.29 percent, and the euro slid to $1.1160. Reuters puts the market's bet on an October Fed hike at about one in two during that phase.
Then central bankers weighed in. Michelle Bowman and Mary Daly signaled, per Reuters, that there is no reason to rush. Yields turned: ten-year paper now sits near 5.09 percent, thirty-year near 5.43 percent. The euro gains about 0.5 percent, sterling rises to $1.3253, and the yen to 157.74 per dollar.
What currency traders are weighing now
The picture remains split. On one side are price data that could justify tighter policy. On the other is a Fed that does not want to commit. The dollar swings between the two, and until the rate decision on October 27-28, that is unlikely to change much.
The equity backdrop adds to it. Reuters points to worries about the debt loads of large AI companies weighing on stocks. Kit Juckes of Societe Generale and Khoon Goh of ANZ describe a market torn between expecting a correction and strong economic data.
What momentum says
For EUR/USD at 1.12196, the snapshot shows a split picture: momentum signals bullish on the hourly chart and neutral on the 4-hour chart. On the daily and weekly charts it reads bearish. The short-term recovery thus runs against a broader downtrend.
Scenarios
If the Fed holds its wait-and-see stance and yields keep falling, the euro can initially defend the 1.12 mark. If the next price data surprise to the upside again, the October hike regains weight, and a slide back toward 1.1160, the level where the euro briefly traded after the inflation figures, becomes conceivable.