Sticky Inflation To Keep Dollar Supported

Impact on GBP: Sterling remains innocent bystander

With one-week deposit rates at 4.75% and the highest in the G10 space, Sterling may be deriving some inflows as the market makes up its mind about the speed and magnitude of Trump's policy agenda. Additionally, the Bank of England rate profile continues to get traded closer to the Fed than the ECB and suggests Sterling should outperform against the Euro. According to?ING Bank, their?year-end GBP/EUR at €1.2048 – is not too far from current levels.

However, the risk to that forecast probably lies more to €1.1904? than?€1.2195? since the UK is less exposed on the trade side and the BoE has yet to abandon its concern over late-cycle inflation. The BoE's Chief Economist, Huw Pill, was yesterday's latest MPC member to cite the ongoing focus on service inflation.

No Major Data.

Impact on EUR: Euro has little reason to be cheerful

EUR/USD struggled to rally yesterday despite some US macro data which was not as strong as it could be. Holding the Euro back was probably the fallout in the European auto sector yesterday, as it reacted to the prospect of Trump following through on his pre-election threats. German car maker equity prices were off 3-6% yesterday.

There is not a lot on the Eurozone calendar today and the best chance of a EUR/USD move will be on the back of the US inflation data. EUR/USD still looks quite oversold based on its 6-7% two-month drop, which suggests any dip towards the $1.0400/$1.0425 area today could be enough of a decline before any potential month-end rebalancing Dollar sales emerge.?

No Major Data.

Impact on USD: Sticky US inflation to keep market guessing over Fed rate cuts

The Dollar remained reasonably bid on Tuesday as markets digested the US tariff news, while news of a peace deal between Israel and Hezbollah has not affected the market much. Apart from the understandable pressure on the Mexican Peso and US car producers with facilities south of the border, there was little impact on the US rates markets. In other words, the inflationary side of potential tariffs has yet to play out in US asset markets.

On the subject of inflation, today sees the release of the core PCE deflator for October. The 0.3% month-on-month reading may still be a little too high for the Fed's liking, although such a number is fully discounted today. That means the market probably retains its pricing of 15bp worth of Fed cuts in December and also keeps US rate differentials versus the Rest of the World at reasonably wide levels.

The consensus and a note from?ING Bank this morning is?they are?bullish on the Dollar and see today's US data set, including confirmation of US third-quarter GDP at 2.8% quarter-on-quarter annualised, will be the last in this holiday-shortened week. In its entirety, the environment looks Dollar-bullish. The main downside risk to the Dollar this week probably comes from month-end rebalancing flows. Here the huge divergence for Dollar-based equity investors of S&P 500 +5.3% month-to-date versus -1.36% for the Eurostoxx 50 or -1.6% for the Nikkei 225 warns of rebalancing Dollar sales to raise European and Japanese equity weightings back to benchmarks. These flows could be going through poor liquidity conditions later this week, but any DXY dip to the 106.25/50 area this week should meet good demand.

Major Data:

13.30: Prelim GDP q/q expected unchanged 2.8% & Unemployment Claims expected 215k from 213k.

15.00: Core PCE Price Index m/m expected 0.3%.?

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