Dollar Steadies in Calm Before CPI and Central Bank Storm

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London—The dollar steadied on Tuesday ahead of the release of U.S. inflation data and the final Federal Reserve meeting of the year, with investors waiting to update interest rate outlooks.

A month ago, a small surprise to the downside unleashed a wave of bond buying and dollar selling on the expectation that inflation had peaked. The figures, due at 1330 GMT, will test that assumption, while the Fed’s decision on Wednesday should provide some reasonably instant feedback from policymakers.

Economists polled by Reuters expect November core inflation to be steady at 0.3 percent month-on-month but see a moderation in the annual pace, with headline prices seen 7.3 percent higher than a year earlier.

“Our view is that the Fed are going to need to see several months of soft inflation data before they can signal the all clear,” said Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

“CPI is one of the biggest data releases for global FX markets and it should be pretty important today,” Turner added.

By 0937 GMT, the dollar index was flat at 104.99, having hit a 20-year peak of 114.78 in late September.

The dollar index’s biggest daily drop and second largest daily gain in 2022 have occurred on days when U.S. CPI has been released.

The dollar has been supported by high and rising interest rate expectations as the Fed has hiked its benchmark rate to counter inflation, leaving the currency vulnerable to selling if inflation seems to be cooling.

Market projections for the peak in U.S. interest rates have also slipped, with futures pricing indicating the Fed funds rate— currently set between 3.75 percent and 4 percent—staying below 5 percent.

The Fed is widely expected to hike the funds rate by 50 basis points (bp) on Wednesday, a step down in pace after four consecutive 75 bp hikes.

The British pound was unchanged after mixed labor market data, which showed a tick up in the unemployment rate but basic wages increased by the most on record excluding the coronavirus pandemic.

Sterling was last flat against the dollar at $1.2272 ahead of the Bank of England (BoE) policy decision on Thursday. It hit a near six-month high of $1.2345 last week.

“Today’s wages data is a reminder of how difficult things are for the Bank of England,” ING’s Turner said, who expects a 50 bp hike on Thursday but notes an outside risk of a 75 bp rise.

“Wages are contributing to high inflation at a time when the economy is decelerating, so for sterling, the data is going to keep it supported.”

The euro, meanwhile, was steady at $1.0539, while the Swiss franc was at 0.9373 per dollar as traders eyed Thursday meetings of the European Central Bank and Swiss National Bank.

Like the Fed and BoE, both are expected to hike by 50 bps.

The Chinese yuan was flat as enthusiasm about China’s COVID-19 re-opening prospects started to waver, even though Hong Kong relaxed some of its restrictions.

By Tom Westbrook and Samuel Indyk



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