Fundamental Analysis

Currency Futures Decline as Dollar Gains on High Inflation, Safe Haven Demand

  • The US consumer price index (CPI) increased by 0.4% in September.
  • The dollar benefited from safe-haven buying, prompted by the escalating Middle East conflict.
  • US consumer sentiment declined in October.

Currency futures were on the back foot on Friday as the US dollar reached a one-week high amid expectations of Fed hawkishness. Robust US inflation data reinforced expectations that the Federal Reserve might need to maintain higher interest rates for longer.

In September, the consumer price index (CPI) increased by 0.4%, keeping the annual rate at 3.7%, the same as in August. Additionally, data from Wednesday revealed that US producer prices surged more than anticipated in September, primarily driven by increased energy and food costs.

The dollar also benefited from safe-haven buying, prompted by the escalating Middle East conflict, as Israel urged civilians to leave the northern Gaza Strip. 

Meanwhile, Philadelphia Federal Reserve President Patrick Harker expressed his belief on Friday that the US central bank might have concluded its cycle of interest rate hikes. 

Although recent economic data has reflected strength, many market participants believe the Fed has completed its tightening cycle. Several Fed officials, citing higher bond yields, which elevate credit costs and pose a greater obstacle to economic growth, have indicated that they may also be done with rate hikes.

US consumer sentiment (Source: University of Michigan)

US consumer sentiment (Source: University of Michigan)

US consumer sentiment declined in October, with households anticipating higher inflation in the coming year. However, the robust labor market is likely to continue supporting consumer spending. The survey’s one-year inflation expectations measure rose to 3.8% this month from 3.2% in September, marking the highest reading since May 2023. Moreover, it remained well above the 2.3% to 3.0% range seen in the two years before the pandemic.

On Thursday, the US dollar surged, causing the yen to approach the sensitive 150 level it briefly reached the previous week before gaining significantly on Friday. This move raised suspicions that authorities were intervening in the currency market. 

Investors also digested producer and consumer price data from China on Friday, which indicated that deflationary pressures were somewhat stronger than anticipated. Consequently, the Australian dollar, often considered a proxy for Chinese economic growth, fell.

Meanwhile, the Canadian dollar gained ground against the US dollar as the price of oil, a significant Canadian export, experienced a sharp increase. Moreover, investors increased bets on another interest rate hike by the Bank of Canada later this month.