Lower than expected US inflation in October adds to hopes that tightening cycle is at the end

Inflation in the United States cooled more than expected in October, providing relief to the Federal Reserve, as the narrative starts to turn towards an end of tightening cycle and introducing talks about rate cuts, expected to start sometime in the second quarter of 2024.

Consumer prices rose by 3.2% y/y in October vs 3.7% increase in September and beating forecast at 3.3%, while more significant core inflation which excludes volatile food and energy components, rose 4.0% against market consensus for unchanged increase from the previous month by 4.1%, rising at the slowest pace in over two years.

The US policymakers are satisfied by the latest data which further eased pressure and signaled that inflation is likely to decline further, in extension of the fastest drop in decades.

However, the Fed expects more evidence of cooling inflation, particularly in housing sector, to verify and accelerate shift from hawkish stance towards normalizing the monetary policy, as inflation is still well above 2% target.

The latest data also contributed to further drop in expectations that the Fed will raise its policy rate any higher than the current 5.25% to 5.50% range and boost optimism among market participants that the worst is likely over.

The Fed stayed on hold since July, when it last raised interest rates, with most seeing no further tightening, though will remain cautious in light of the most recent more hawkish than expected remarks from Fed Chair Powell.

Upbeat October inflation data strongly hit the demand for US dollar, pushing the currency lower across the board.

The dollar index was down 1.5% after data release and hit ten-week low after the biggest one-day drop since 10 November 2022, with strong technical support zone being cracked and warning of further weakness.