USD: Inflation may stay too hot – ING

The second round of post-election Trump trades has now taken the Dollar Index (DXY) to the 2022 highs as markets sink their teeth into the dual narrative of a wider rate and growth gap between the US and other developed countries. The latest news on the government appointment side is that Elon Musk and Vivek Ramaswamy will lead a ‘department of government efficiency’, which aims to slash bureaucracy and spending. It is too early to tell what this will effectively mean for public finances, but this confirms that Musk will play a key advisory role in the Trump administration, which likely fuels expectations for de-regulation and looser taxation, ING’s FX analyst Francesco Pesole notes.

DXY can consolidate above 106

“The strong USD is currently pricing in a good deal of Trump’s policy mix, and data releases/dovish Fed comments might offer good opportunities to take profit in bullish dollar positions. However, our house view for today’s US inflation report is that core CPI kept rising at a consensus 0.3% MoM in October, and headline CPI at 0.2%. This is above the 0.17%MoM rate that needs to be averaged over time to hit the 2% inflation target, and should keep markets on the dovish side of the pricing for the Fed.”

“Still, pricing is already quite cautious on further Fed easing, with only 15bp priced in for December and 23bp by January. This means there is probably an asymmetric downside risk for the dollar today in case of a slightly lower-than-expected core CPI print. There are also a few Fed speakers to monitor today: Kashkari, Williams, Musalem and Schmid.”

“If we are right with our CPI call, then the dollar rally could find a bit more steam and DXY consolidate above 106. Nevertheless, the recent bullish move is starting to look a bit stretched, and the risk of a positioning-led short-term USD correction similar to the 7 November one is quite high.”