FX.co ★ CPI Uptick, Fed Hints Boost Dollar Again

During the week ending November 15, the U.S. dollar demonstrated notable strength against major currencies, supported by anticipated increases in consumer price inflation in the U.S. and Federal Reserve Chairman Jerome Powell's indication of a lack of urgency to lower interest rates.

The Dollar Index, which benchmarks the U.S. dollar against a selection of six currencies, increased by 1.61% during this period, marking its seventh consecutive week of gains. The index had previously risen by 0.69% for the week ending November 8, approximately 0.74% for the week ending October 25, and nearly 0.58% the week before that.

On Wednesday, data from the U.S. Bureau of Labor Statistics revealed that annual headline inflation rose to 2.6% in October, up from September's 2.4%, the lowest since February 2021. This marked the first increase in headline CPI in seven months, although the core inflation rate remained at 3.3%. Monthly inflation rates were steady at 0.2%, with the core rate at 0.3%, aligning with market expectations.

Thursday saw the release of producer price inflation data for October, which also indicated a rise to 0.2% from the previous month's 0.1%, in line with forecasts.

Additionally, U.S. unemployment claims data showed a surprising decrease to 217,000 for the week ending November 9, contrary to market expectations of an increase to 223,000 from the prior week's 221,000.

Fed Chair Jerome Powell stated that the current economic conditions did not necessitate an urgent rate reduction by the Fed. He noted the strength of the economy allows for careful decision-making, acknowledging that inflation has significantly eased from its peak and suggests a sustainable path to the 2% target. He further highlighted that the labor market has cooled, reducing inflationary pressure.

Retail sales data, released by the U.S. Census Bureau on Friday, indicated a monthly increase of 0.4% for October, exceeding the predicted 0.3%. Revised figures for September showed retail sales growing by 0.8%.

Powell's commentary moderated expectations for rate cuts, with the CME FedWatch tool showing the probability of a 25-basis point rate cut in December decreasing to 61.9% on Friday from 65.3% earlier in the week. Conversely, projections for maintaining the current rate rose to 38.1% from 34.7%.

The DXY recorded a low of 104.93 on Monday, reached a one-year high of 107.06 on Thursday, and closed at 106.69 on Friday, having been at 105.00 the week prior.

The euro weakened against the U.S. dollar, driven by the dollar's Fed-related strength and concerns over U.S. trade policy. The EUR/USD pair fell to 1.0541 on November 15 from 1.0718 the previous week, a 1.65% drop, moving between a high of 1.0727 on Monday and a one-year low of 1.0496 on Thursday. Sentiment was also influenced by the European Central Bank's latest monetary policy meeting minutes, which acknowledged the disinflationary process.

The U.S. dollar also gained against the British pound amidst a higher-than-expected rise in the U.K.’s unemployment rate, sparking hopes for rate cuts by the Bank of England. The GBP/USD pair declined by 2.35% from 1.2921 on November 8 to 1.2617 on November 15, with fluctuations between a high of 1.2926 on Monday and a low of 1.2594 on Friday. Data showed the U.K.’s GDP growth at 0.1% for the third quarter, down from 0.5% in the second quarter and below forecasts of 0.2%, underscoring rate cut expectations and weakening the pound.

Similarly, the Australian dollar fell by 1.81% against the U.S. dollar, influenced by tempered Fed rate cut expectations and weak economic data from China. Uncertainty regarding the Reserve Bank of Australia's potential rate cut path, amidst mixed employment data, also played a role in the currency's fluctuation. The AUD/USD pair, having closed at 0.6580 on November 8, rose to 0.6598 on Monday before dropping to 0.6439 on Thursday and settling at 0.6461 on Friday.Over the past week, the Japanese yen experienced a decline against the U.S. Dollar. The USD/JPY currency pair, which stood at 152.63 on November 8, escalated to 154.34 within the week. It reached a low of 152.62 on Monday, and by Friday, it had soared to a multi-month high of 156.74. This weakening of the yen occurred amidst a hawkish stance from the Federal Reserve and a significant drop in GDP, potentially limiting the Bank of Japan's ability to further tighten interest rates. Additionally, the Canadian dollar, Swedish krona, and Swiss franc—key components of the Dollar Index, alongside the euro, British pound, and Japanese yen—also saw declines, each losing over one percent against the dollar. Over the week ending November 15, the dollar appreciated by 1.45 percent against the franc, 1.36 percent against the krona, and 1.29 percent against the Canadian dollar.

As the new week commenced, the Dollar Index, comprising six major currencies, remained robust at 106.72. The EUR/USD pair rose to 1.0549 amidst a temporary halt in the dollar's rally. The British pound also strengthened, reaching $1.2627. Meanwhile, ahead of the Reserve Bank of Australia's meeting minutes release, the AUD/USD pair edged down to 0.6452. As Bank of Japan Governor Kazuo Ueda refrained from specifying the timing of the next interest rate hike, the yen weakened further, driving the USD/JPY pair up to 155.19.