VOT Research Desk
The following charts will show that the US dollar has been thrown into a crucial support level.
On the heels of one inflation figure that fell short of expectations on Thursday, the markets are currently experiencing a bout of frenzy.
As goods prices decreased and service price inflation, ex-shelter, decreased in October, US consumer price inflation increased 0.3% MoM. Inflation in food prices also decreased, increasing 0.6% MoM as opposed to 0.8% in September.
Investors are fleeing the US dollar in droves because of the pent-up desire for risk and their belief that the Federal Reserve would change course in response to the report. Indeed, although the statistics offered some investors hope that consumer prices may have finally started heading lower, the softer-than-expected US CPI strengthened the argument for riskier assets.
The benchmark 10-year Treasury yield fell to 3.8387%, its lowest level in over a month, as a result of the report, decreasing the spread between US and foreign government debt yields, which has enhanced the attraction of the US dollar. The Federal Reserve will not, however, place undue emphasis on a single month’s worth of data, according to analysts at ANZ Bank.
Prior to feeling sure that inflation is on course to return to goal, it needs to see a sustained decrease in monthly inflation. Loretta Mester, the president of the Fed’s Cleveland branch, remarked on the CPI figures in a recent exchange on Thursday.
The October CPI figure released this morning also implies some softening in overall and core inflation, the speaker said, but noted, there remain some upside risks to the inflation outlook.
The market will be led by this kind of language to believe that even when the Fed’s policy rates peak, they will likely continue to rise for a longer period of time. Over the horizon of today’s CPI report, this may be extremely positive for the dollar.
Furthermore, Fed official Daly stated that there is no indication of wage price spiralling and that inflation is one of the most lagging indicators, adding that the Fed requires its “policy to remain appropriately tight until see inflation is well on its way to 2%.
The ANZ Bank analysts predicted that the Fed would increase rates by 25 basis points in February and March and by 50 basis points in December, assuming that core inflation would moderate in the fourth quarter, or Q4. We maintain our forecast, with the fed funds rate expected to reach a top of 5.0% in Q1.
In fact, many investors are wary of placing bets on a sustained decline in the value of the dollar.
The experts also predicted rate rises and stated that, in their opinion, safe-haven flows would continue to strengthen the USD. Like many other assets, including stocks and real estate, cryptocurrencies did well during a period of low interest rates.
The outlook for risky assets has been negatively impacted by increasing US interest rates this year, which has increased demand for the USD as a safe haven currency.
US Dollar Weekly Analysis
In conclusion, before the meeting on December 13–14, we will receive one more jobs report, as well as new statistics on inflation and retail sales.
The dollar may once again be perceived as the spotless shirt in the hamper if there are indications that inflation is starting to rise once again or if geopolitical and COVID threats to global economy increase.
According to the experts at Rabobank, USD demand is reliant on global commerce and growth, both of which are constrained by USD strength. Although the USD may be nearing the end of its surge, we think it is much too early to predict a turnabout.
