FOREX VIEW

Fed Hike Bets Build as US Inflation Surprises to the Upside

Global markets came under pressure following higher-than-expected US inflation data, reinforcing expectations of further monetary policy tightening by the Fed. US headline CPI inflation accelerated to 3.7% YoY in September from 3.4% in August, above expectations of 3.6%, while core inflation increased to 2.6% from 2.4%. On a monthly basis, headline prices rose by 0.6%, driven largely by higher energy prices, while core prices increased by 0.3%. Consequently, market-implied probability of a 25-bps Fed rate hike in October increased to over 40% from around 20% before the release.

US equities declined sharply, led by technology stocks, amid concerns over elevated interest rates and AI-related investments. The US Dollar Index initially strengthened following the inflation print, although gains moderated later in the session, trading below 102 levels. Meanwhile, Brent crude remained elevated near USD 105/bbl amid continued geopolitical tensions in the Middle East.

Attention today will turn to US PPI, retail sales and weekly jobless claims for further cues on inflation and the strength of domestic demand.

1. EUR/USD

EUR/USD initially weakened to around 1.112 following the stronger-than-expected US inflation print, before recovering to around 1.119 in early Asian trading today. The pair has also remained under pressure amid political and fiscal uncertainty in France, alongside elevated energy prices. Expectations of further Fed tightening could keep the pair under pressure.

2. USD/JPY

USD/JPY rose towards 159 levels but subsequently retreated to around 157.7 as the dollar gave up some of its gains. The divergence in monetary policy expectations, with markets increasingly pricing in further Fed tightening while expectations of an imminent BoJ hike remain subdued, continues to weigh on the yen. However, the risk of intervention by Japanese authorities could limit further depreciation, particularly as the pair approaches the 160 level.

3. India WPI

Wholesale inflation accelerated to 11.39% YoY in September from 9.92% in August, driven by higher fuel, food and manufactured product prices. Fuel and power inflation rose to 25.85%, while manufactured products inflation increased to 9.76%, highlighting continued upstream price pressures.

USD/INR closed at 95.15 yesterday. The rupee has appreciated by around 2% (vs USD) following the RBI's recent measures to curb speculative positions in the FX market. However, renewed dollar strength and elevated crude oil prices could limit further significant appreciation.