USD: Sticky inflation to keep market guessing over Fed rate cuts

The US Dollar (USD ) remained reasonably bid on Tuesday as markets digested the US tariff news, while news of a peace deal between Israel and Hezbollah has not affected the market much. Apart from the understandable pressure on the Mexican peso and US car producers with facilities south of the border, there was little impact on the US rates markets. In other words, the inflationary side of potential tariffs has yet to play out in US asset markets, ING’s FX analyst Chris Turner notes.

The environment looks dollar-bullish

“On the subject of inflation, today sees the release of the core PCE deflator for October. The 0.3% month-on-month reading may still be a little too high for the Fed's liking, although such a number is fully discounted today. That means the market probably retains its pricing of 15bp worth of Fed cuts in December and also keeps US rate differentials versus the Rest of the World at reasonably wide levels.”

“We are bullish on the dollar and note that today's US data set, including confirmation of US third-quarter GDP at 2.8% quarter-on-quarter annualized, will be the last in this holiday-shortened week. In its entirety, the environment looks dollar-bullish to us. The main downside risk to the dollar this week probably comes from month-end rebalancing flows.”

“Here the huge divergence for dollar-based equity investors of S&P 500 +5.3% month-to-date versus -1.36% for the Eurostoxx 50 or -1.6% for the Nikkei 225 warns of rebalancing dollar sales to raise European and Japanese equity weightings back to benchmarks. These flows could be going through poor liquidity conditions later this week, but any DXY dip to the 106.25/50 area this week should meet good demand.”

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