After surging across the board yesterday, the US dollar partially reversed gains during the Asian session, with the dollar index returning towards 94 followinga positive surprise in the PPI Index. November’s headline producer prices gauge rose 3.1% year-over-year, beating median forecast of 2.9% and previous month reading of 2.8%. This is the largest increase since January 2012. Excluding the most volatile components, such as energy and food prices, the measure increased 2.4%y/y, matching market expectations. The surprise in the headline gauge is not exclusively due to the solid gains in crude oil prices throughout November but also due to the distortions created by the Hurricane season.
November’s consumer price index is due for release today. The headline gauge is expected to notch up to 2.2%y/y from 2% in October. The core measure should remain stable at 1.8%y/y. An upside surprise in the headline measure appears likely, especially against the backdrop of positive pressures from energy prices. However, the market remains cautious regarding the inflation outlook as the 1y breakeven inflation currently stands at around 1.43%y/y.
Finally, the December FOMC meeting will be the main event today. Fed members will provide their latest update on both the inflation and growth outlook. The main question today is not whether the Fed will raise borrowing costs today, as it already priced in at 100%, but rather how dovish/hawkish Janet Yellen will sound during the press conference. Any significant change in the dot-plot could affect significantly the USD outlook. So far, the market is expecting at least two rate hikes next year, if not three.
By Arnaud Masset