The news that markets had been desperately hoping for finally arrived last week.
Inflation in the US came out lower than expected, US rates dropped the most since the pandemic era and risk assets worldwide soared in jubilation. The dollar experienced one of the sharpests two-day falls in history, falling anywhere from nearly 6% (against the Japanese yen) to just under two percent (against the Canadian dollar, the week’s second-worst performer). Emerging market currencies also rose. The notable exception was the Brazilian real, where markets had a brutal reaction to a Lula speech suggesting that he favours Truss-style unfunded spending.
This week the focus will be on a raft of inflation reports for the month of October in several G10 countries including Sweden, Canada, the UK, and Japan. These will be scrutinised for signs that inflation is peaking, though we think that the positive surprise out of the US last week cannot be extrapolated to other economic areas. We will also be paying attention to two scheduled speeches from ECB President Lagarde. For now, the relentless dollar rally appears to have peaked, and the path of least resistance for the greenback may be down in the short term.