Euro tumbles after strong CPI numbers

The Euro took a severe hit against the dollar in yesterday’s trading session after a strong round of inflation figures out of the US reignited fears that the US Federal Reserve may deliver another rate hike next month.

The US Bureau of Labor Statistics (BLS) reported that September’s Consumer Price Index (CPI) rose by 3.7% year on year against analysts’ expectations for a figure of 3.6%, and unchanged compared to the previous month. The same report revealed that core CPI rose by 4.1% which was slightly down from the previous months figure of 4.3%. Following the data, US Treasury bond yields rose, the US Dollar advanced against the Euro and other majors, and equities dropped as market participants speculated that the US Federal Reserve would raise rates before the year’s end.

The US central bank is in currently in a delicate balancing position because on one hand, the need to Rise interest rates further may slowly be diminishing but on the other hand, rates may need to stay higher for longer according to the release of the latest FOMC minutes. This is likely to pile further pressure on household spending.

“The Fed will want to see at least six months of lower inflation before declaring victory,” said Julia Pollak, chief economist at online job marketplace ZipRecruiter.

“In the meantime, higher borrowing costs are weighing on households, particularly those with credit card debt or subprime car loans; and on businesses, especially those with high levels of debt in variable-rate bonds. If rates stay higher for longer, as the Fed has signalled, that will likely drag down consumer spending and business spending including on hiring in the coming months.” She added.

Looking further ahead today, the main drivers of the EUR/USD currency pair will be the release of a monetary speech from ECB president Christine Lagarde where the question of any further rate hikes from the ECB will be on the table.

To finish off the day market participants will await the release of the Michigan consumer sediment index which may create a few opportunities in the currency pair to close out the week.