The dollar strengthened on Monday, following data showing producer prices in the United States rose faster than expectations last month. Analysts believe this was due to inflationary pressures persisting and triggering fears of more hawkish fed policy decisions going forward, beginning with the next FOMC meeting.
The US PPI for final demand rose 0.3% in November, and 7.4% year over year, according to data released Friday. Expectations had been for a 0.2% monthly figure and a 7.2% yearly number.
Sterling dropped 0.27% to $1.22335 during early Asian trading as the Australian dollar slid 0.34% lower to $0.6773. The kiwi fell 0.37% to $0.6391.
Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA) noted, “There were a little bit of concern about how inflation would be persistently high and would encourage the Fed to keep policy at a restrictive level for even longer than previously expected.”
Key risk events, including a key inflation report and a number of important central bank policy meetings were keeping traders on edge this week.
Traders will primarily be focused on the US Federal Reserve meeting, where it is expected policymakers will produce a 50 basis point hike. However the real focus will be on Fed Chair Jerome Powell’s post-meeting press conference, and the bank’s updated economic projections.
Carol Kong explained, “If he does talk more about the risks to the economy … I think that will probably be considered dovish by markets and of course, markets love dovish comments and how the FOMC will pay more attention to downside risks to the economy.”
Also meeting this week will be the European Central Bank and the Bank of England. Both are expected to deliver 50 basis point rate increases.
Of the ECB meeting, Kong noted, “ECB officials have been telling us that they care more about the underlying inflation, which has remained elevated. If they do hike by 50 bps … they might follow up with some pretty hawkish comments in Lagarde’s post meeting conference.”
In other news, the dollar increased 0.12% against the yen to 136.73, and the dollar was up 0.04% against a basket of currencies at 105.09
The offshore yuan rose slightly higher at 6.9730 per dollar, off increased optimism as China begins to loosen its stringent Covid restrictions.
On Tuesday the US will release key inflation figures just ahead of the Federal Reserve’s meeting. Economists are predicting core inflation, which removes volatile food and energy price increases, will rise 6.1% year over year.
Analysts at Barclays noted, “The market reaction to U.S. inflation surprises has been asymmetric so far in 2022, with downside surprises having a larger effect than upside ones. The inflation print will likely be the bigger driver of the two, (given) the Fed’s guidance toward smaller hikes.”
