US recap: EUR/USD slips on firm US PPI, while sterling rebounds

Oct 12 (Reuters) – The dollar index held firm on Wednesday as the US currency surged to 24-year highs against the yen and firmed against the euro with the help of above-forecast US PPI, but it stood aside as sterling rebounded 1% on hope that BoE emergency bond-market support would remain intact

Investors were keeping some powder dry, however, ahead of Thursday’s US CPI and Friday’s retail sales reports, which will refine Fed rate-hike expectations.

The market is pricing in roughly 160bp of hikes and a terminal fed funds rate at 4.67%, right by the Fed’s median 2023 dot plot, where most policymakers have been guiding since the last meeting.

Minutes from that meeting reinforced their higher-for-longer message but also acknowledged that risks would become more two-sided the further policy ventured into restrictive territory.

In contrast, Governor Haruhiko Kuroda reaffirmed the BOJ’s negative interest rate policy, fueling USD/JPY gains.

Meanwhile, markets expect the BoE will hike rates a full percentage point at each of its next two meetings and by roughly 350bp by May in a frantic attempt to tackle inflation, while putting out fires in the financial markets.

The ECB is priced hiking another 230bp, with rates seen peaking just shy of 3% next year.

Europe’s much higher cost and lower ability to mitigate dwindling energy supplies from Russia remain a hindrance for the euro and sterling.

Though well off this year’s peaks, European nat gas prices are 670% higher than in the US gas, compared to pre-COVID ranges of 150-300%.

If US CPI, particularly core, remains high and retail sales don’t slump, EUR/USD’s 0.9528 September lows could be revisited.

Sterling found support by the 50% Fibo of its rebound from record lows, but may need further BoE risk mitigation confirmed Friday to sustain that.

USD/JPY has 1998’s 147.64 peak in play on the assumption the BOJ won’t intervene again before there, as it’s the speed of the advance that threatens more action.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)