US inflation the highest in four decades
The eagerly awaited US consumer price index came in as expected on Friday ahead of a busy week with focus on several central bank events. Prices grew the fastest in four decades in November at 6.8% y/y on the back of gas and energy increases.
The core CPI measure was also in line with forecasts at 4.9% y/y, but still at uncomfortable levels and well above the Fed’s 2.0% symmetric target, suggesting that the central bank could officially announce the start of a faster bond tapering cycle on Wednesday with scope to mitigate the nonstop inflation rise.
Dollar holds steady but awaits a hawkish FOMC meeting
Powell and several of his colleagues have already signaled a hawkish policy shift, though what is still unknown is how large the pace of reductions in bond purchases will be, and more importantly, whether interest rates will pick up earlier than previously expected, probably before summer 2022.
The US dollar index remained flat at 96.18 in the aftermath as the 10-year Treasury yield stood steady slightly below its weekly highs. Yet, today’s CPI data suggested the Fed may not have the comfort of waiting too long before it acts, and that could provide an advantage to the US dollar relative to its European peers if the ECB and the BoE struggle to make their minds next week – at least in the short term.
Note that the ECB is even thinking to moderately increase its regular bond purchases after its pandemic bond program ends in March, showing no interest in playing catch up with the Fed.
Technically, a hawkish FOMC event could leave euro/dollar exposed to a downtrend resumption below the 1.1190 low as the pair has almost reversed Wednesday’s bullish breakout above the 20-day simple moving average (SMA). Pound/dollar could also be at risk of breaching the key 1.3200 – 1.3160 support zone and marking a new lower low around 1.3100.
The Japanese yen could be a bigger victim as the Bank of Japan may keep playing the same boring dovish song next week. Currently, there is a tough resistance around the 114.00 level, which the bulls need to claim to gain control.
Stock indices in the green; gold moderately up
In stock markets, US futures gained positive momentum following the CPI release, securing a bullish weekly close for Wall Street. The pan-European STOXX 600 is also eyeing a positive close to the week, despite today’s neutral trading, with non-consumer cyclicals and energy offsetting losses in utilities and real estate shares.
Turning to commodities, gold made tiny steps up to $1,778/oz, though a key ceiling is still laying overhead around the 1,800 level and the 200-day SMA. WTI crude oil continued to push towards yesterday’s highs.
