USD hits three-month lows ahead of US CPI

Hopes of a soft landing and even the fabled “Fed pivot” are now seen as the most likely events in the new year.

Inflation is predicted to cool further, while other top tier US data like non-farm payrolls, have softened. This has caused Treasury yields to fall dramatically which in turn have pulled the dollar lower.

Selling dollar rallies seems more appropriate than buying the dip, which was prevalent through the summer. Indeed, markets are lining up the worst monthly performance in the USD this year.

We note also that the last two months of the year are historically seasonally weak for the greenback.

Markets paid a lot of attention to Fed speakers yesterday with Fed Governor Waller grabbing most of the headlines.

He said policy appeared tight enough to contain inflation and flagged the chance of lowering rates.

• Another Governor, Bowman, hinted her support for additional tightening was growing more conditional, but she did make a hawkish warning too.
   
• Money markets are now seeing a 25bp rate cut at the Fed’s May meeting as a coin toss.
   
• The FOMC is seen as the most dovish major central bank over the next 18 months with around 100bps of cut next year.

Have the markets got ahead of themselves again?

It would seem an increasing number of Fed officials are talking more cautiously, though the rate cut view is loosening financial conditions and potentially undoing the most aggressive tightening of policy in decades.

Focus will turn to the US core PCE data released on Thursday. This is the Fed’s favoured inflation gauge as it is a broader measure of prices and is expected to cement the rate cut theme.

Sticky prices could potentially offer some support to the beleaguered dollar. A major Fibonacci level (61.8%) of the summer rally sits at 102.54 on the DXY Index.

Can EUR/USD push above 1.10 after euro zone inflation data?

We get European country inflation data this morning before the region’s numbers tomorrow.

A further drop in eurozone inflation is forecast with the headline index of consumer prices in the 20 countries that share the single currency set to fall from 2.9% in October to 2.8% in November, which will be closer to the ECB’s 2% target. 

The core rate, excluding energy and food, is expected to drop from 4.2% to 3.9%.

This could generate more excitement about how soon rate cuts will start especially with the eurozone economy likely to have entered a technical recession in Q4.

But ECB members have been slightly more hawkish in recent comments as they are still wary of persistently high wage growth.

EUR/USD advanced to a three-month high above 1.10 yesterday.

Prices are overbought on several momentum indicators. Initial support might be seen at retracement support, the 61.8% Fibonacci of the second half decline, at 1.0961.