US CPI Rises Again
The latest inflation data out of the US, released on Friday, has bolstered hawkish expectations ahead of this week’s FOMC. The November CPI reading showed yet a further rise in US prices, once again above forecasts, bringing the pace of inflation in the US to its highest level since 1982. On the month, inflation was seen rising 0.8%, putting annualised inflation at 6.8%, the fastest increase in prices since June 1982. Core CPI, meanwhile, was seen higher by 0.5% on the month. Annualized, core CPI hit 4.9%, its biggest rise since summer 1992.
Energy Prices & Food Prices Soar
Looking at the breakdown of the data, the usual suspects were well accounted for. Energy prices saw a 33.3% gain year-on-year, with gasoline specifically up almost 60% on the prior year. Meanwhile, food prices were seen rising 6.1% on the year along with used vehicle prices soaring 31.4% on the year. Looking at these two inputs specifically, energy prices and food prices, the increases seen over the last year marked the fastest increases in 13 years, highlighting the velocity of the current inflationary surge.
In light of yet another above-forecast inflation report, the market is now well primed for the Fed to step up the pace of tapering when it meets this week. Even with the doves in the Fed arguing that the current inflationary spike is linked to transitory, pandemic-driven factors, inflation is still on course to top 7% this year, well above the Fed’s own estimates.
Urgent Need To Tackle Inflation
There is now a growing urgency for the Fed to tackle inflation. The latest report form the Labor Department showed that real average hourly earnings (accounting for inflation) fell again over November. This comes despite an increase in gross pay, showing that the pace of inflation is far exceeding wage growth. Additionally, the ongoing pressure on consumers is starting to take a toll on President’s Biden’s approval level with recent polls reflecting a dissatisfaction with his economic performance.
Omicron Risks
Given the expectations heading into this week’s FOMC then, there are clear downside risks for USD should the Fed not deliver. If, perhaps as a result of the uncertainty around Omicron, the Fed decides to hold off on boosting tapering, this might see near-term USD price action take a nosedive, allowing stocks and commodities room to run higher.
Technical Views
DXY
The Dollar index is currently holding in a contracting triangle formation in the upper end of the longer-term bull channel. While prices holds above the broken 95.83 level, the focus is on a continuation higher and a breakout towards a test of the 97.90 level, with the 61.8% Fib retracement coming in just ahead of that level. To the downside, any drop lower will see 94.63 and the rising channel low as the next support area to watch.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.