Major currencies circulated in a fairly narrow range amid a wait-and-see atmosphere ahead of the release of US inflation data.
The US dollar index (DXY) is firm in the 96.20s in the early European session today (10/December). Market participants expect the release of US inflation data later tonight to support the prospect of a Fed rate hike next year. However, those expectations alone are not strong enough to push the USD rally higher. The major currency pairs circulated in fairly narrow ranges amid this wait-and-see nuance.
Consensus expects US consumer inflation to accelerate to 6.8 percent (Year-on-Year) in November 2021, or higher than the 6.2 percent growth in October. Meanwhile, the core inflation rate is forecast to increase from 4.6 percent to 4.9 percent (Year-on-Year).
If the actual inflation data outperforms the consensus forecast, the surprise is likely to strengthen speculation about accelerated tapering and the Fed's rate hike. In addition, consumer confidence data released separately can provide additional insight into future inflationary pressures.
"Inflation is going to accelerate," said Tom Porcelli, chief US economist at RBC Capital Markets, who estimates the US inflation rate will continue to rise to close to 7 percent in the new year.
"As a result, we think the combination means a (Fed rate) hike is very likely in March (2022)," continued Porcelli, "The market (currently) is pricing in about a 40% chance (for a March rate hike) but we now think the odds are a little higher. Maybe like (the probability of) tossing a coin now."
The greenback's position is also resilient as several other central banks that will announce policy next week are likely to be more dovish. The European Central Bank (ECB) and the Japanese Central Bank (BoJ) are unlikely to change monetary policy in the near future. Meanwhile, the British central bank (BoE) had sparked expectations of a rate hike this month, but then spread the signal that it would wait until next year.
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