Intense UK U-Turn speculation.

US consumer prices increased 0.4% for September, above consensus forecasts of 0.2% with the year-on-year rate declining only slightly to 8.2% from 8.3%. Food prices increased 0.8% on the month with an annual increase of 11.2%. Energy prices posted a third successive monthly decline with the annual increase slowing to 19.8%.

Core prices increased 0.6% for the second month running and above forecasts of 0.5% with the year-on-year rate strengthening to 6.5% from 6.3% which was above expectations of 6.5% and the highest rate since late 1982.

A decline in the price of used cars was offset by higher prices for new vehicles. Services excluding energy posted a 0.8% on the month with a 6.7% annual increase.

There was inevitably sharp selling in Treasuries after the consumer prices data with the 10-year yield peaking near 4.04%. The US 2-year yield also increased to 4.50% and the highest level since 2007.

Markets moved to price in a 100% chance of the Fed hiking rates by a further 75 basis points in November.

US equity futures dipped very sharply after the US inflation data with the S&P 500 index close to 2.5% lower in an immediate reaction.

There was, however, a sharp reversal after the Wall Street open with strong buying triggering a wave of stop-loss buying and the S&P 500 index closed over 2.5% higher.

Just ahead of Thursday’s US open, there were media reports that the government was preparing to make a further U-turn and abandon some further elements of the controversial tax package.

In response, there was a strong rally in gilts and Sterling.

Chancellor Kwarteng denied any change, but political pressure was seen as unstoppable and Sterling rallied further.

The dollar posted sharp gains after the US data, but a strong rally in equities and recovery in UK asset prices triggered a sharp reversal in markets and European currencies rallied strongly on short covering.

USD/JPY also retreated from 32-year highs above 147.50 after reports of Bank of Japan intervention, but this was not confirmed.

The UK government response is likely to trigger further high volatility on Friday with central bank actions and rhetoric also watched closely as the IMF meetings continue.

There will also be the risk of sharp gaps at Monday’s Asian open following weekend events.

There were no major Euro-Zone developments during Thursday. EUR/USD dipped to lows near 0.9625 immediately after the US inflation data. The Euro rallied strongly as equities recovered and the dollar dipped. EUR/USD surged to highs around 0.9820 before a retreat to around 0.9785 on Friday.

USD/JPY dipped to lows near 146.50 from 32-year highs above 147.50. USD/JPY rallied to near 147.50 on Friday as the Bank of Japan rejected a policy turn.

The Swiss franc lost ground as equities moved lower. EUR/CHF rallied strongly to 0.9780 with a USD/CHF peak at 1.0070 before a sharp reversal to around parity.

Sterling was subjected to very high volatility during Thursday. From highs at 1.1280, GBP/USD slumped to 1.1150 after the US data before powering ahead again on further speculation over a fiscal U-turn. GBP/USD peaked at 1.1380 before settling just above 1.1300. GBP/EUR rallied sharply to 1-month highs near 1.1612 before settling around 1.1560.

Commodity currencies plunged after the US inflation data before regaining losses as equities surged. AUD/USD dipped sharply to 30-month lows around 0.6170 before a strong rebound to 0.6330. USD/CAD surged to 29-month highs above 1.3950 before a sharp decline to around 1.3725.

Economic Calendar

13:30Core Retail Sales m/m-0.1%-0.3%
13:30Retail Sales m/m0.2%0.3%
15:00Prelim UoM Consumer Sentiment58.758.6

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.