U.S. Dollar Extends Losses after Inflation Surprises on the Downside for September

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- USD extends losses after inflation disappoints the market.

- Food, energy and used vehicles weigh on consumer prices.

- Data may place question market over Federal Reserve outlook.

The Dollar extended earlier losses Thursday after official data revealed a surprisingly sharp fall in inflation during September.

U.S. inflation rose at a rate of 2.3% during September, down from 2.7% back in August, when markets had looked for it to decline only to 2.4%. Core inflation held steady at 2.2% when consensus was for an increase to 2.3%.

The core measure is most important because it removes commodity items from the goods basket and so is seen as more representative of domestically generated price pressures.

Food and energy prices declined in September while used vehicles were a weight around the ankles of both measures of inflation.

"Core CPI inflation is now tracking 2.2% which likely implies a tick down in the Fed's preferred measure of inflation, core PCE, to 1.9%, a touch below the central bank's target. As a result, the slight downside miss should be moderately negative for the US$ and positive for fixed income," says Katherine Judge, an economist at CIBC Capital Markets.

Markets care about price and inflation data because it has direct implications for interest rates.

Changes in rates are only normally made in response to changes in domestic inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

Thursday's figures may now place a question mark over the extent to which price pressures will compell the Federal Reserve (Fed) to keep raising its interest rate over the coming months.

The Fed has raised interest rates eight times since the end of 2015, including twice in 2018, taking the Fed Funds rate range to between 2% and 2.25%.

Economists say the Fed is likely to lift rates so the top end of that range hits 3.25% around the end of 2019.

The U.S. Dollar index was quoted 0.48% lower at 95.04 for the session following the release after having fallen from 95.64 since Wednesday's opening bell in New York.

The Pound-to-Dollar rate was 0.20% higher at 1.3231 while the Euro-to-Dollar rate was 0.28% higher at 1.1565. The greenback was down against all G10 currencies except the Japanese Yen during the European noon.

Price action comes on a day when the Dollar is in retreat following a rout in the bond prices that spooked stock markets across the globe, leading the carnage to spill over into currency markets. 

Pound Sterling Live covered the underlying causes of the rout as well as the mechanics driving the interaction between the various markets in an earlier piece Thursday.



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