Rising inflation expectations may support the USD

US Dollar Fundamental Forecast: Mixed

  • Rising inflation expectations could support the USD in the near term against its main counterparts.
  • Fourth quarter GDP data and consumer price growth data for January will be closely watched by market participants.
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Strengthening signs of inflation to buoy USD

The US dollar could continue to gain gains against its major counterparts in the near term as a noticeable increase in inflation fuels bets that the Federal Reserve could tighten its monetary policy levers sooner than expected.

The Fed’s preferred measure of consumer price growth – the Core Personal Consumption Expenditure (PCE) index – climbed 1.5% yoy in December, surpassing market estimates of 1.3% print. The ISM producer price sub-index also rose unexpectedly, rising to 82.1 in January and shattering forecasts for a more conservative rise to 77.

Indeed, inflation pressures may continue to build in the coming weeks as Democrats pave the way for President Joe Biden to get the majority of his proposed $1.9 trillion stimulus package with a simple majority.

10-year break-even inflation rate

10-year break-even rate chart

Source – FRED

Positive progress in vaccination and declining coronavirus cases may also promote further growth in consumer prices. The 7-day moving average for tracking Covid-19 infections has decreased by more than 130,000 in the past three weeks, while more than 33 million Americans have received at least one dose of a coronavirus vaccine.

However, it still seems relatively unlikely that the Fed will want to adjust its monetary policy settings any time soon, after the central bank reiterated its pledge to continue to increase its Treasury holdings by at least $ 80 billion a month and mortgage-backed agencies. securities by at least $ 40 billion per month until substantial progress is made towards the maximum targets of the Committee on Employment and Price Stability ”.

Several Fed members have also discussed the idea of ​​phasing out bond purchases in the near term, with Chairman Jerome Powell saying that “the whole focus on exit is prematureAnd James Bullard, president of the St. Louis Fed, who noted that “we are still in the middle of a crisis, so it’s too early to start that discussion.”

Inflation releases in focus

Upcoming Economic Releases

Finance Prop economic calendar

Looking ahead, January inflation data and fourth quarter GDP data will be closely watched by market participants.

A larger than expected rise in consumer price growth and a surprisingly positive GDP release could reduce the need for further stimulus measures and in turn support the US dollar against its major counterparts.

– Written by Daniel Moss, Analyst for Finance Prop

follow me on twitter @DanielGMoss

USD Forecast

USD Forecast

Recommended by Daniel Moss

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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