USD gains ahead of inflation data – Scotiabank

The US Dollar (USD) is broadly higher ahead of today’s key risk events. Reuters reported that the Chinese authorities are considering abandoning their stable yuan policy and allowing the CNY to weaken, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

USD rises for a fourth day as markets position for CPI data

“The CNY fell 0.3%, pulling regional peers lower and dragging the AUD and NZD weaker. The JPY was choppy around comments attributed to “people familiar” with BoJ policy deliberations; officials apparently see little cost in waiting to raise interest rates but remain open to hiking next week. Swaps reflect 4-5bps of hiking risk at next week’s policy decision now, down from 16bps or so late last week.”

“US CPI data for November may bolster concerns among some Fed policymakers that progress on inflation has stalled since the summer when core inflation based at 3.2%. The consensus anticipates a 0.3% gain in headline and core prices in the month, nudging the headline inflation rate over the year up a tenth to 2.7% and holding the core rate at 3.3%. On consensus data may not weigh significantly on market expectations for a 25bps rate cut from the Fed next week but it might raise the risk of the Fed’s communications sounding a little more cautious on the outlook.”

“Firm data will give the USD a modest lift at least. Note that the Cleveland Fed’s core PCE Nowcast gauge anticipates a pickup in November to 2.9% Y/Y, the highest since last December. Assuming we get a 1/4-point cut next week to 4.50%, futures suggest easing in 2025 may be limited to just another 50-75bps in the Fed funds target rate. Shallower US rate cuts relative to Europe will underpin the outlook for a strong for longer USD into 2025.”