UK GDP contraction.

US consumer prices increased 0.4% for October compared with consensus forecasts of a 0.6% increase with a larger than expected decline in the year-on-year rate to a 9-month low of 7.7% from 8.2% and compared with expectations of 8.0%.

Food prices increased 0.6% on the month for a 10.9% annual increase while energy prices increased 1.8% on the month although with a sharp decline in gas prices.

Core prices increased 0.3% on the month with the annual rate slowing to 6.3% from 6.6% and below expectations of 6.5%. Used-car prices declined 2.4% on the month and apparel prices also declined, but there was a further 0.8% increase in shelter prices as rents continued to increase sharply. The data increased optimism that inflation had peaked.

Following the data, there was a sharp adjustment in Fed Funds futures with markets pricing in just over an 80% chance that the Fed Funds rate would increase by 50 basis points at the December meeting compared with below 50% ahead of the data. Peak rate expectations also declined to below 5.0%.

US Treasuries posted strong gains after the US inflation data with the 2-year yield sliding to below 4.30% from 4.60% while the 10-year yield also retreated sharply to below 3.85% from close to 4.10%. The 10-year yield retreated slightly further to 1-month lows near 3.80% on Friday.

The inflation data provided strong relief to equity markets with sentiment boosted by the shift in Fed expectations and sharp decline in bond yields. Optimism that peak inflation had been seen also boosted confidence. US indices posted very strong gains with a 7.3% surge in the Nasdaq index and all global bourses made headway.

The dollar also posted very sharp losses on the shift in rate expectations while the surge in equity markets also undermined potential US currency demand. The dollar index slumped to 8-week lows with EUR/USD trading above 1.0200.

USD/JPY also slumped over 5 big figures from peak levels with lows below 141.00 and the sharpest daily decline in the pair for 6 years.

Overall sentiment surrounding cryptocurrencies remained extremely fragile with further fears over the near-collapse in FTX and withdrawal restrictions elsewhere. The surge in risk appetite did provide an element of relief with net gains.

UK GDP declined 0.6% for September, worse than the expected decline of 0.4%, but the third-quarter decline was held at 0.2% which provided some relief.

There was hawkish ECB rhetoric with council member Schnabel stating that there is no time for monetary policy to pause with policy needing to move into restrictive territory. German bond yields still declined on the day. Stronger risk appetite underpinned the Euro in global markets.

The dollar posted very heavy losses after the US inflation data. EUR/USD surged to highs above 1.0200 and, after a limited correction, posted 12-week highs around 1.0235 on Friday.

The yen was notably resilient on the crosses despite a surge in equities. USD/JPY posted very heavy losses with the largest daily slide for 6 years and lows below 141.00. USD/JPY rallied to 141.60 on Friday as gains in equities undermined the yen before a retreat to 141.20.

The Swiss franc was resilient as global yields declined. EUR/CHF settled around 0.9850 with USD/CHF sliding to 6-week lows below 0.9650 to trade around 0.9625.

Sterling posted strong gains as the dollar slumped and equities posted sharp gains. GBP/USD surged to highs above 1.1700 with further gains to 1.1730 on Friday despite mixed GDP data.

Commodity currencies surged after the US CPI data with US dollar losses and surge in risk conditions. AUD/USD initially jumped to highs near 0.6600 and extended gains to 6-week highs near 0.6650 on Friday. USD/CAD retreated sharply to lows just below 1.3300.

Economic Calendar