Strong US PPI rise calls for decisive Fed response
The cable rallied against the dollar on Wednesday thanks to release of a bullish inflation report which showed that the rise in consumer prices accelerated in November, beating forecasts. The headline inflation rate reached 4% against the forecast of 3.7%, while in the previous month inflation averaged to 3.4%. The BoE has a difficult choice: to agree to a greater inflation risk, leaving the policy soft to smooth out the risks of a new wave of a pandemic, or to raise the rate now by limiting the risk of inflation, but making the economy less resilient in the face of possible new restrictions, which the government seems to be mulling over. In any case, GBPUSD strengthened on the data release, which means that some market participants are betting on a hawkish outcome of the Bank of England meeting this week.
Release of US PPI report on Tuesday shows that inflation pressures rise in unabated fashion
despite the Fed assurance made earlier that the upside momentum should soon start to fade. The monthly growth in production prices exceeded the forecast and amounted to 0.8% against the forecast of 0.5%. At the same time, the core PPI rose almost double the forecast, and this is no less important, because this inflation gauge excludes goods whose prices are subject to strong monthly fluctuations. In annual terms, PPI shows extremely strong growth, of course, some can be attributed to the low base last year, but what is important to note, after some short stabilization in August-September, the indicator turned to growth again, which should probably worry the Fed, because in the end, this growth will seep into the consumer prices:
The data formed the basis for yesterday's rally in greenback index (DXY) to the level of 96.50, as now the perception of inflation threat by the Fed and its response, which we will learn about at today's meeting, is the key driver in FX.
Meanwhile, the dollar is trying to get out of the triangle pattern and resume the upward movement, anticipating a hawkish outcome of the Fed meeting:
It is possible that this is a trap, as it often happens, and the markets may be disappointed by the Fed's response to inflation challenges, which will cause dollar sell-off, as recent USD gains were fueled by expectations that the Fed will pull decisively ahead in the tightening race today. However, taking into account the latest data on inflation, namely, inflation expectations of US households, which jumped to 6% and PPI, which growth is beating expectations, the Fed does not have much room for maneuver. Inflation in the US needs to be contained, the question is how decisive the answer should be.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The cable rallied against the dollar on Wednesday thanks to release of a bullish inflation report which showed that the rise in consumer prices accelerated in November, beating forecasts. The headline inflation rate reached 4% against the forecast of 3.7%, while in the previous month inflation averaged to 3.4%. The BoE has a difficult choice: to agree to a greater inflation risk, leaving the policy soft to smooth out the risks of a new wave of a pandemic, or to raise the rate now by limiting the risk of inflation, but making the economy less resilient in the face of possible new restrictions, which the government seems to be mulling over. In any case, GBPUSD strengthened on the data release, which means that some market participants are betting on a hawkish outcome of the Bank of England meeting this week.
Release of US PPI report on Tuesday shows that inflation pressures rise in unabated fashion
despite the Fed assurance made earlier that the upside momentum should soon start to fade. The monthly growth in production prices exceeded the forecast and amounted to 0.8% against the forecast of 0.5%. At the same time, the core PPI rose almost double the forecast, and this is no less important, because this inflation gauge excludes goods whose prices are subject to strong monthly fluctuations. In annual terms, PPI shows extremely strong growth, of course, some can be attributed to the low base last year, but what is important to note, after some short stabilization in August-September, the indicator turned to growth again, which should probably worry the Fed, because in the end, this growth will seep into the consumer prices:
The data formed the basis for yesterday's rally in greenback index (DXY) to the level of 96.50, as now the perception of inflation threat by the Fed and its response, which we will learn about at today's meeting, is the key driver in FX.
Meanwhile, the dollar is trying to get out of the triangle pattern and resume the upward movement, anticipating a hawkish outcome of the Fed meeting:
It is possible that this is a trap, as it often happens, and the markets may be disappointed by the Fed's response to inflation challenges, which will cause dollar sell-off, as recent USD gains were fueled by expectations that the Fed will pull decisively ahead in the tightening race today. However, taking into account the latest data on inflation, namely, inflation expectations of US households, which jumped to 6% and PPI, which growth is beating expectations, the Fed does not have much room for maneuver. Inflation in the US needs to be contained, the question is how decisive the answer should be.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.