In today’s briefing:
- US CPI Review – 10% increase in Energy Inflation!
- EUR Watch – The ECB will soon reveal their true inflation vs growth preferences
- The Growing Central Bank Dilemma and the FX Trade that Goes with It
US CPI Review – 10% increase in Energy Inflation!
- What a report that just dumped in our inbox.
- Both core and headline surprise on the upside of expectations MoM, with headline increasing from 3.2% YoY to 3.7%, while core comes in at 4.3% YoY vs 4.7% previously – the era of rising headline inflation and falling core inflation is here.
- The change is mostly driven by a HUUGE rebound in Energy inflation, coming in at 5.58% MoM vs 0.11% in July, with Gasoline prices up 10.5% since last month.
EUR Watch – The ECB will soon reveal their true inflation vs growth preferences
- The ECB is likely going to hike tomorrow and even after the repricing this morning, we still see risk/reward favoring a bet on a hike.
- With the inflation forecast likely being hawked up (as per sources in Reuters), we see a very high probability that the ECB will react to the hawkish adjustment of staff projections with a hike and continued hawkish messaging.
- If the ECB raises the inflation profile to >3% territory in Q4-2023 and Q4-2024, that would constitute a >0.3%-points increase in the profile, which will most certainly have to be followed up by policy action.
The Growing Central Bank Dilemma and the FX Trade that Goes with It
- The most recent UK wage growth figures are a big disappointment for Bank of England Governor Bailey and his colleagues.
- The Bank of England must choose between battling inflation or anticipating a recession with GDP growth and employment dwindling.
- Sooner and deeper rate cuts in the UK compared to the US is what likely takes down the GBPUSD exchange rate further.
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