The US dollar experienced another broad-based sell-off last Friday amid disappointing inflation and retail sales data. Commodities currencies benefited the most of this renewed USD weakness as investors discounted an aggressive Fed rate path. The single currency rose 0.58% to 1.1875 before eroding gains and returning towards 1.1820 as market participants appeared reluctant to load long EUR position against the backdrop of political uncertainties across the European Union - mostly Catalan and Austrian situation.
Regarding the inflation in the US, the headline measure came in at 2.2%y/y versus 2.3% expected and 1.9% in August, while the core measure, which excludes the most volatile components, held stable at 1.7% versus an expected increase of 1.8%. The solid pick-up in the headline measure is mostly due to a surge in energy prices as motor fuel prices and fuel oil rose 13%m/m and 8.2%m/m, respectively. Food prices, on the other hand, remained roughly stable, increasing only 0.1%m/m. The increase in energy prices stemmed from the combination of two main factors. Firstly, oil prices have strengthened over the summer months amid shrinking oil inventories in US and efforts of OPEC producers to trim production in an attempt to boost oil prices. Secondly, the series of hurricanes that hit the Gulf Coast disrupted significantly oil production and also triggered widespread gas hoarding.
On Monday morning, however, the greenback got some colour back as fears eased. The US dollar erased almost completely Friday’s losses against the euro and the pounds, while the Aussie and the Kiwi consolidated previous gains. Investors don’t know where to stand against the backdrop of an uncertainty outlook on both side of the Atlantic. Indeed, the single currency has benefited extensively of the weakness in US inflation together with mounting speculations of the upcoming reduction of the ECB’s QE. Now that the EU is facing another political crisis, investors are reconsidering other alternatives.
By Arnaud Masset