Inflation in France surprises, but investors’ attention focused on USA

Today’s inflation reading from France has unnerved the market. However, a change in sentiment couldn’t be achieved. Data from the USA continues to glow brighter. 

Chasing its own tail

This week, the main global currency pair is behaving like a lost six-year-old in a candy store. It’s not really sure where to focus its attention. We started the week with a test of the lower limit at $1.10, only to attack $1.11 the next day. On Wednesday, we managed to break up as well as redirect to support. Thursday was another attack on opposition, only to take a round trip on Friday. Today’s chaos is the result of the French inflation reading, which dramatically fell in the last month. A result of only 1.2% clearly surprised the markets. Investors quickly concluded that such a sharp drop is a symptom of economic problems, which is not exactly groundbreaking. Slowly, the narrative is returning to mainstream that, yes, Americans may be on the brink of a hard landing, but Europeans have long since crossed this threshold. Therefore, the previously played pace of interest rate cuts – one per quarter – is impossible to maintain. And this should reflect on the common currency.

Eyes looked across the ocean

The thing is, not only the euro has its own problems. The market, after quite a spectacular September victory over Powell, has whetted its appetite and begun a campaign for a double cut at the next FOMC meeting. The report on Americans’ spending today will be an important weapon in this battle. Analysts are in a slight divide here, as they expect a further drop in the main inflation indicator along with a boosting base index. Both the market and Fed decision-makers have a long history of juggling the hierarchy of these two readings, depending on the direction of the wind du jour. As the masses are demanding a cut, there’s no point boggling their minds with a higher value.

Crazy Chinese printers

The maniacal need for monetary policy easing is not just a matter of Europe or the USA. The Chinese are further delving into this bleakness, who – in addition to cutting interest rates – have decided to return to their favorite investor trick and flooded the markets with freshly created money. Stock indexes in the Middle Kingdom have reacted with obvious exuberance, definitely ending the exhausting downwards trend. Within a week we have moved from extreme pessimism to hatching a new bull market. The green quickly spilled over to other trading floors, not just Asian ones.

The end of the week has also been quite energetic for the zloty. Initially, there was another test of important supports on the XXXPLN charts. Euro cheapened to 4.25 zloty, dollar to 3.80 zloty, and the franc went down to 4.485 zloty. However, the second half of the week is the capitulation of our currency, increasing EUR and USD exchange rates by 3 pennies. The franc regained more, strengthening against the zloty nearly 6 pennies after the decision to cut interest rates (indeed!) in Switzerland.

Author: Krzysztof Adamczak, currency analyst at Walutomat.pl