The USD has remained steady against its major rivals and financial markets are moderately quiet as investors await the release of the US inflation data. The US Dollar (USD) Index, which evaluates the USD’s performance against a basket of six major currencies, was down on Monday, while early Tuesday, was flat.
What to expect in the report?
Annual inflation in the US, as measured by the change in the Consumer Price Index (CPI), is anticipated to decline from 3.7% in September to 3.3% in October. Annual Core CPI inflation is expected to remain at 4.1% in October. The monthly CPI and the Core CPI are anticipated to increase 0.1% and 0.3%, respectively.
The inflation report will influence the value of the USD as it will change the market pricing of the Fed’s rate outlook. The highly anticipated US Consumer Price Index (CPI) for October will be published by the Bureau of Labour Statistics (BLS) at 13:30 GMT.
Federal Reserve and inflation data
Federal Reserve (Fed) officials have emphasised that monetary policy will depend on the release and evaluation of economic data. Last week, Fed Chairman Jerome Powell said at the International Monetary Fund (IMF) conference that “we are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation.” Nonetheless, for this year, the Fed is expected to leave the interest rate unchanged at the 5.25%-5.5% range. According to the CME Group FedWatch Tool, markets have priced in more than an 80% probability that the Fed will remain on hold at the December meeting.
However, with Powell also saying that the Fed is not confident they have achieved a “sufficiently restrictive” policy stance to bring inflation down to 2%, the US CPI inflation data will be key, and it could influence market expectations about the Fed’s rate outlook.
How will the inflation report affect the USD?
If the monthly core inflation comes in at 0.5% or higher, then market expectations for a hawkish Fed will increase, along with the USD. On the other hand, a weak Core CPI increase of 0.2% or less could confirm that the Fed will remain on hold and could weigh on the currency. Others noted that if the data disappoints, the USD could weaken, and if the data meets expectations, the drop in headline inflation will possibly push equities higher and weigh on the US Dollar – even if Core CPI remains high.
How high is inflation?
For the USD then to gain significant momentum and rise, inflation will have to surprise remarkably to the upside. While significantly elevated inflation may not guarantee another Fed rate hike, it may at least point towards higher interest rates for a longer period. Such a scenario will provide support for the greenback.
Market participants currently expect higher rates to bring inflation lower without pushing unemployment higher or hurting growth. However, if this image is tarnished, then the USD will come under pressure.