• Dollar under pressure after Brainard’s comments
• Pound traders turn gaze to inflation and fiscal agenda
• Wall Street closes in the red despite gains elsewhere

The US dollar traded higher against all but two of the other major currencies on Monday, helped by remarks from Fed Governor Christopher Waller, who warned that the Fed would not “soften” its fight against inflation, although they may consider slowing the pace of their future rate increases.

That said, the greenback is on the back foot again today, and this may have been due to Fed Vice Chair Lael Brainard placing more emphasis on the case of a slower rate path hereafter, adding that she and her colleagues are trying to figure out how high borrowing costs could rise and how long should they stay at their terminal level in order to tame inflation.

Following Thursday’s softer-than-expected CPI data, the dollar came under strong selling interest, resulting in important technical breakouts in several major pairs as investors scaled back their bets with regards to future Fed hikes. For example, pound/dollar broke above the downtrend line drawn from the high of February 23, euro/dollar emerged above the key resistance – now turned into support zone – of 1.0095, and dollar/loonie completed a head and shoulders formation.

Because of that, further data and rhetoric adding credence to the narrative of a less aggressive Fed could allow some more dollar selling. But with market participants now pricing in almost two quarter-point rate cuts by the end of 2023, the door for a rebound in case of developments pointing otherwise seems to have opened again. The US PPI data for October today could prove just that, as a smaller slide in those rates compared to the CPIs could enhance the notion that interest rates may stay at their terminal level for much longer than currently anticipated. Therefore, any dollar-reversal discussion likely remains premature, and any further declines in the US dollar may be still seen as a larger downside correction.

Apart from the US dollar, another currency that could receive extra attention this week may be the British pound. With the first estimate of the UK GDP revealing that the economy shrank by less than expected in Q3, traders may have turned their attention to the jobs report for September, the inflation data for October, as well as the new government’s budget announcement.

The jobs report was released today, with the unemployment rate rising by a tenth of a percentage point, and wages excluding bonuses accelerating somewhat. However, with inflation running at 10.1% during the reporting period, real wages remained well into the negative territory, and with Wednesday’s CPI data expected to reveal that headline inflation kept accelerating to 10.8%, the pain UK consumers are feeling is far from gone.

At its latest meeting, the Bank of England appeared to have become more concerned about the wounded economy rather than sky-high inflation. Thus, even if inflation accelerated notably in October, investors are unlikely to significantly alter their BoE hike bets, especially just a day ahead of the budget announcement. They are currently seeing a 50bps hike as the base case for the December gathering and the announcement of fiscal tightening on Thursday could do very little to change that as it implies downside risks to the BoE’s already lackluster projections.

This likely keeps the risk of another round of pound selling in the foreseeable future firmly on the table, but with the dollar under strong pressure recently and the broader market sentiment improving, pound/dollar may not be the best pair for exploiting any potential pound weakness. Pound/aussie could be a better choice, as the aussie has a stronger correlation with broader market sentiment compared to sterling.

European equities ended another session in the green on Monday, driven by solid gains in Germany’s Infineon, which raised its long-term financial targets. That said, sentiment turned around quickly during the US session, with all three of Wall Street’s main indices closing in the red, perhaps still feeling the heat of Fed Waller’s remarks.

Appetite improved again today in Asia and Europe, while US futures point to a higher open on Wall Street later in the day. It seems that it is still early to start examining a downtrend resumption in equities as more remarks in the same frequencies as those of Fed Vice Chair Brainard may allow some more buying.

China’s willingness to remove the strict COVID related curbs is also helping investors to add some more risky assets to their portfolios, but with daily infections rising further, the case for expansion of district-level lockdowns cannot be ruled out. This, combined with the fact that the market has turned more dovish with regards to the Fed’s future course of action – leaving room for hawkish surprises – likely keeps the latest recovery in stock markets in the category of corrective rebounds.