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Recent data from the US coupled with increasingly disappointing data from China has left the FED backed into a corner. FED futures have now priced a “no chance” of a US rate hike in December, with the first hike now pointing to April 2016.

Weaker retail sales, Industrial production and NFP (jobs) coupled with a “strong” USD have started to have an effect on the US economy resulting in a change in the rhetoric from FED members and economists (including the IMF and World Bank). The fallout from China is starting to bite hard leaving Central Banks with no other option other than to WAIT before hiking rates. Negative inflation in the UK (-0.10%) was the big news of the week and not even the drop in unemployment and wage growth could help matters. Initially the GBP dropped to 1.52 before recovering over the past 36 hours on the back of disappointing US and China data. This story is getting bigger and bigger and I have no doubt the coming months will mean trading conditions remain tough.

US CPI numbers to be published later today with the market expecting a 0.1% rise (from last months +0.10%). This is an important data release because the FED have openly announced the importance of inflation (increasing) so anything under 0.10% will be seen as further evidence of a slowdown in the US and a delay in hiking rates.

“If the euro can’t go down on the Volkswagen story, and the euro can’t go down on the Greek story, it should be telling you something,” said David Bloom, global head of FX research at HSBC. “The Fed is not as hawkish as people thought [it] would be and the ECB is not as dovish as people think [it] should be,” he said. “The monetary-policy differential is actually closing and that’s favouring the euro.” In other words the delay in hiking rates in the US and the China slowdown is playing into the EUR’s hands and providing support. Recently we have seen more and more FX traders piling into the EUR with additional gains expected over the coming months. If US CPI disappoints today, be rest assured the USD will get hit hard again.

EM currencies have enjoyed a respite and appreciated on the back of the weaker USD. The S.African ZAR for example has appreciated over 7.50% from the low on 29 September which gives you an idea on how sensitive EM currencies are to changes in the USD. Further USD weakness will see further EM strength.

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