BoE’s Pill backs significant rate hike.

US producer prices increased 0.4% for September after a 0.2% decline the previous month with the annual rate slowing to 8.5% from 8.7% and slightly above consensus forecasts of 8.4%.

Underlying prices increased 0.3% for the second successive month and in line with expectations with the year-on-year rate slightly lower at 7.2% from 7.3%.

Minutes from the September Fed meeting stated that many participants consider the risks of doing too little outweighed the cost of doing too much, but there were also comments that at some point it would be appropriate to slow the pace of rate hikes and assess developments.

Several members emphasised the importance of maintaining a restrictive stance for as long as necessary, but this was countered by other comments that risks would become more two-sided as policy became more restrictive. There was some evidence of splits over longer-term policies.

US bond yields declined on Tuesday which provided an element of relief for markets. The 10-year yield declined to lows below 3.90% before edging higher again.

Wall Street rallied at times but failed to hold gains and closed with limited net losses.

There was no evidence of a significant policy shift on exchange rates within G7 and underlying yen sentiment remained weak on yield grounds.

USD/JPY posted fresh 24-year highs just below 147.00 amid an overall firm dollar tone with no intervention to support the Japanese currency.

The latest US consumer prices data will be released on Thursday and will be extremely important for all asset classes.

Consensus forecasts are for a headline increase in prices of 0.2% with the annual increase slowing to 8.1% from 8.3% Core prices are forecast to increase 0.5% with the year-on-year increase increasing to 6.5% from 6.3%.

Strong data would reinforce the Fed’s hawkish message and tend to reinforce dollar strength while weaker data would provide at least initial relief for risk conditions.

Bank of England chief economist Pill stated that he was still inclined to believe that a significant monetary response will be required at the next policy meeting due to significant macro and market news of the past few weeks.

He added that government policies must ensure that tax cuts and higher spending do not threaten public finances or the effectiveness of the Bank of England over the medium term. MPC member Mann stated that it was better to front-load rate hikes when inflation expectations are drifting.

The German economy Ministry warned that there would be negative GDP growth for the at least until the first quarter of 2023. European gas prices edged higher on the day, but held close to 4-month lows. A small decline in US yields limited dollar buying, but the currency was resilient. EUR/USD dipped to just below 0.9670 before a recovery to around 0.9700.

USD/JPY posted further gains despite a small decline in US bond yields. Japan’s Finance Minister Suzuki warned over excessive FX moves, but with no move to intervene. USD/JPY posted 24-year highs just below 147.00 and consolidated around 146.80.

The Swiss franc held firm but retreated from intra-day highs. EUR/CHF settled near 0.9680 with USD/CHF around 0.9970.

Sterling recovered strongly during the day as UK bond yields retreated from highs, but overall volatility remained extremely high. GBP/USD traded just above 1.1100 before trading just below this level on Thursday.

Commodity currencies eventually managed to post a very tentative recovery. AUD/USD found support below 0.6250 and rallied but was held just below 0.6300 amid underlying caution. USD/CAD found support below 1.3800 and traded around 1.3820 on Thursday.

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