As the Dollar Rises, Investors Turn Their Attention to U.S. Inflation
The US dollar has maintained its value gain in recent days, while investors are focused on the US inflation data to be released today at 16:30 GMT. This data will provide clues regarding the Fed's monetary policy, potentially influencing global markets.
According to a research note published by Unicredit Research, the dollar has been rising recently due to expectations that the policies of Donald Trump, who was re-elected as President, will be inflationary. Analysts predict that these policies could force the Federal Reserve to limit interest rate cuts.
The rise in bond yields has shaken global stock markets. Stock markets worldwide experienced declines for the second consecutive day due to the increase in US Treasury yields. On Wednesday, MSCI's All Country World Index fell by 0.2%, while European stocks showed no signs of recovery after a 2% loss the previous day. Asian markets also faced declines, and US stock futures continued to drop.
Notably, the rise in US Treasury yields on Tuesday caused significant volatility in the markets. The yield on the 10-year benchmark bond surged by 12 basis points following the Veterans Day holiday, while the two-year bond yield increased by 9 basis points, reaching its highest level since the end of July.
Trump's policies are driving bond yields higher. Following Trump's victory in the US presidential elections, investors have focused on the expectation that his proposed lower taxes and higher tariffs will lead to increased government borrowing and a growing budget deficit. It is believed that these policies could spur economic growth and inflation, thereby preventing the Federal Reserve from cutting interest rates.
US inflation data is critical for the Fed's monetary policy. The most significant event that investors are focused on is the upcoming US inflation data. The Consumer Price Index (CPI) for October, to be released today, is expected to guide the markets. A 0.3% increase in core inflation is anticipated, with a signal of recovery also being sought in headline inflation.
Unicredit Research indicates that a stable core inflation rate will support the dollar, while any increase in headline inflation could further strengthen it. Additionally, it is noted that the current likelihood of disinflation significantly impacting the strength of the dollar is low.
The dollar has climbed to a six-month high. It is observed that the US dollar has surged against other currencies to its highest level in six months following Donald Trump's presidential victory. The dollar continues to strengthen in an environment where Trump's inflationary policies are priced in, and investors are anticipating lower taxes and new trade tariffs.
The dollar index has risen to 106.21, marking its highest level since May 1, while the Japanese yen has fallen to its lowest level since July. This increase in the value of the US dollar is seen as supported by expectations that the US economic strength will persist throughout 2024.
What are the expectations regarding a potential interest rate cut from the Fed in December? According to CME Group's FedWatch tool, investors assess the likelihood of the Federal Reserve making a quarter-point interest rate cut at its meeting on December 18 at 62%. This figure was at 77% last week. However, it is believed that the CPI data could further lower this probability.
Fed Chair Jerome Powell's speech on Thursday and retail sales data to be announced later in the week may provide new clues about the Fed's future monetary policies. These developments are expected to play a crucial role in determining the direction of the markets.