The dollar strengthened on Monday as a result of data that showed producer prices in the US increased more than anticipated last month. This data indicated ongoing inflationary pressures and fueled concerns that the Federal Reserve would need to maintain higher interest rates for longer.
According to data issued on Friday, the U.S. producer price index for final demand increased 0.3% in November and 7.4% on a yearly basis. This was slightly more than expected (0.2% and 7.2%, respectively).
According to Carol Kong, a currency analyst at Commonwealth Bank of Australia, “there were some concerns about how inflation would be chronically high and would urge the Fed to keep policy at a tight level for even longer than previously thought” (CBA).
Once again taking centre stage, the Federal Reserve is likely to raise interest rates by 50 basis points. However, attention will be focused on the central bank’s revised economic forecasts and Fed Chair Jerome Powell’s press conference.
Markets appreciate dovish statements and how the FOMC will pay more attention to downside risks to the economy, according to CBA’s Kong. “If he does talk more about the dangers to the economy… I think it will probably be viewed dovish by markets and of course, markets love dovish comments,” Kong said.
This week’s meetings of the European Central Bank (ECB) and the Bank of England are both anticipated to result in rate increases of 50 basis points apiece.
In other news, the dollar gained 0.12% versus the yen to reach 136.73, and the U.S. dollar index barely gained 0.04% against a basket of currencies to reach 105.09.
The offshore yuan yesterday traded slightly higher at 6.9730 per dollar, supported by the hope that China will relax its rigorous COVID regulations.
Tuesday marks the release of November’s US inflation data, which are expected by economists to show a 6.1% annual increase in core inflation.
According to analysts at Barclays, “the market response to U.S. inflation surprises has been lopsided so far in 2022, with downside surprises having a stronger effect than upside ones.”
They continued, “Given the Fed’s stance toward lesser rises, the inflation report will likely be the stronger driver of the two.”
