USD: inflation remains central to the direction of markets

The dollar is broadly holding its recent gains but Marc Ostwald from ADMISI says while the hawks are still circling, the distance they are from the ground means that the doves are breaking cover.

(Video Transcript)

The Chinese economy

So there have been two really big headlines this week on inflation, or should I say one on deflation and one on inflation. Earlier in the week you remember the Chinese economy was deflating again according to year-on-year numbers in July and more and more people are asking if the so-called Japanification is now beginning to take hold in China.

The US economy

That is a long period of deflation. Then came the slightly better-than-expected news in the US economy on Thursday and people are now asking if the Federal Reserve (Fed) has now indeed done enough on interest rates. Let's take a look at what Mark Osborne has been saying this week at ADMISI.

The Federal Reserve

Now he's the Chief Economist and Global Strategist at the Commodities Health and he says the chance of further rate hikes from the Fed now look to be very low. But the Fed will continue to bang the drum for higher for longer above all given that labour demand remains robust and the economy continues to expand.

Both of those shoes he says will have to fall if the current market rate trajectory assumes an initial rate cut in March 2024 and a cumulative 150 basis points of rate cuts to 4% by the end of 2024. So that's a quote we've had from the Fed. So you can see that the Fed potentially looking possibly as though it might broadly have done enough.

USD

But we've seen the USD hold on to the recent gains today. We're down a little bit today after yesterday's close which is the highest close that we've seen in the market for the dollar basket since the 7th of July.

EUR/USD

Quick update on how to trade this using the markets around EUR/USD. The Euro broadly speaking stronger now. We've had also data out this week on the stock market indicating that the European Central Bank is likely to have to keep its foot on the pedal as far as interest rate rises are concerned. And this is why I think that the Euro has had an appreciation.

If you're long on this your stock goes down here under the 100 period moving average right about the 109 level. 109.95 is where we are. A break at the 110 level will then see this market not see too much in its wake before we get to the highs that we saw there back on the 18th of July at 112.76.

GBP/USD

A quick update on what's happening with the GBP/USD chart as well bearing in mind what's been going on here in the markets this week with sterling moving out to that stronger dollar.