USD Sell Off Deepens As Slower Pace of Tightening

The US Dollar is heading lower again this week as the post-CPI decline from last week continues. Yesterday, Fed vice chair Lael Brainard noted that it would likely be appropriate to scale back the pace of tightening from next month, adding weight to the dovish Fed view stemming from a weaker-than-expected October US CPI release. While some other Fed members speaking yesterday shared more hawkish views, it seems Brainard’s comments carried the most weight with the December meeting pricing now reflecting a less than 20% probability of a >50bps hike.

Equities Turn Higher as USD Falls, Shrugging Off China Data

Equities markets had to fight a little yesterday with bond yields turning higher again despite some headline dovish Fed commentary. However, the European open on Tuesday has seen equities pulling back into the green, boosted by a weaker US Dollar. Overnight, the latest China data offered cause for concern with industrial production and retail sales both coming in below expectations. Following a rebound in August, data momentum has fallen back over the last two months raising fears over economic growth though, for now, equities look better tied to the weaker-USD story.

RBA Retains Optionality on Rates

In FX, the weakness in USD is benefiting risk currencies the most. With equities on the bounce back today, the Aussie is leading the G10 FX pack on Tuesday. Overnight, the RBA meeting minutes showed that, despite the recent rates pivot, there is still plenty of two-way risk in the RBA’s outlook around inflation meaning that larger rate hikes are not off the table.

UK Unemployment Rises, Real Wages Fall

GBP has been among the weaker performers today. The latest UK economic data released this morning showed that the unemployment rate increased from 3.5% to 3.6% in the three-months to August while real wages fell once again, heightening recession fears in the UK.

Metals Breakout but Oil Turns Lower

In the metals and commodities space, both gold and silver are moving higher this week, extending gains seen on the back of last week’s USD decline. With USD looking vulnerable to further losses over the week, the near-term outlook remains positive for metals. Crude prices have not been quite so well supported this week. Crude futures turned sharply lower yesterday, trading back down to test last week’s lows. The move came in response to OPEC slashing its global demand outlook for next year, citing “considerable uncertainties” in the outlook. The news comes amidst growing fears for the China demand outlook as COVID cases continue to rise there, prompting fears of fresh lockdowns.