Market Update – September 12, 2017

Market Update – September 12, 2017

Important week for the Forex traders as inflation data takes center stage. Today we had the first release, out of the United Kingdom, and the pound soared on the news.

 

Inflation jumped to 2.9%, which is rapidly moving away from the desired 2% level the Bank of England (BOE) targets. It makes an interesting BOE meeting two days from now as the debate is what to do to slow this uprising trend in prices.

 

In a way, it is an irony. The central bank used the stimulus program to create inflation, but now that it picks up too fast, it’ll have to raise the rates.

 

U.S. Inflation in Focus

It is not the same on the other side of the Atlantic. The Fed has a dual mandate: to keep inflation below or close to two percent and to create jobs. While the second part of the mandate is completed, the problem comes from the CPI. It stubbornly stays low.

 

But, in comparison with the BOE, the Fed is already in the middle of a tightening cycle. It raised the federal funds’ rates from zero to one percent. And, it keeps a hawkish tone.

 

Yet, the dollar enjoyed a bearish trend. And, the stock market is close to record highs.

 

What would reverse the course for the dollar? Inflation, of course. Therefore, traders should keep an eye on the inflation data coming two days from now.

 

If we see an uptick, it may be just what the Fed wants before raising rates again.

 

Quantitative Tightening

 

Next week the Fed is expected to reveal the monetary policy ahead. While it is unlikely to see a rate hike, traders will focus on the quantitative tightening program.

 

The Fed vowed to unwind the balance sheet and it may start doing that by selling 10bn worth of bonds starting with next month. And, to announce more details about the process at the next meeting.

 

From my point of view, the risk is that the move is not priced in. It may represent a hawkish boost for the dollar and a nasty U-turn in the recent dollar trend.

 

Conclusion

 

One thing is for sure. Smart money will position for the move way before the retail traders will. And, it is quite possible that they already did.

 

Another source of relative volatility may come from the SNB (Swiss National Bank) as it is due to set the rates for the period ahead. The CHF acted as a safe-haven lately, but all spikes have been sold. Parity on the USDCHF is key for future prices.

 

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