Key Inflation Facts, Biden Fed Appointment at a Glance

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Fundamental US Dollar Forecast: Bullish

  • US dollar supported by hawkish Federal Reserve policy expectations
  • PCE master data is the center of all eyes on the development of US inflation
  • Fed chairman chooses source of short-term US dollar volatility, but unlikely to last

The US dollar may remain on the offensive over the coming week as markets turn to major economic event risk from the United States. Inflation has been a hot topic in the country, with overall price growth at its most aggressive since the early 1990s using year-over-year calendars. The Federal Reserve’s preferred inflation indicator, the core PCE, is now the center of attention.

It is expected to cross threads at 4.1% y / y in October, down from 3.6% previously. This would be the fastest pace since January 1991 – see graph below. Price readings still high above the central bank’s target would likely continue to keep Fed policymakers on their toes. Nonetheless, the central bank’s broader argument remains that the recent surge in inflation is “transient”.

Basic US PCE data since 1978 – (Y / Y)

US Dollar Forecasts: Key Inflation Data, Focus on Biden's Fed Appointment

Chart created in TradingView

The Citi Economic Surprise Index that tracks the United States has risen into positive territory, with the gauge now nearing the June peak. This suggests that economists vastly underestimate the health and strength of the economy. This can open the door to higher-than-expected data surprises, and not just PCE data. Data on durable goods orders and new home sales as well as the University of Michigan consumer confidence indicator and the minutes of this month’s FOMC meeting are also expected.

Check DailyFX Economic Calendar for more information on US data in the coming week!

Looking at the chart below, the rise of the US dollar since June has been associated with an increasingly hawkish trend Federal Reserve Monetary Policy Expectations. Two rate hikes by the end of 2022 are fully integrated. Meanwhile, the 2-year Treasury yield is around March 2020 levels. Other good economic surprises could bolster these estimates, pushing the US dollar higher.

A near-term source of dollar volatility could come from the expected appointment of President Joe Biden as the next chairman of the Federal Reserve. While Jerome Powell may retain his role, expectations regarding the appointment of Lael Brainard have increased. The markets seem to have determined that this was a more accommodating choice. His appointment could then lower initial yields and raise long-term rates. This can boost stocks at the expense of the US dollar.

Biden’s pick is set to cross the wires ahead of the Thanksgiving holiday on November 25e. However, the reaction is likely to be short-term. The next president will continue to face the ever-growing uncertainty about where inflation is heading, no matter who is chosen. This in turn may keep the bullish argument for the US dollar broadly intact.

US dollar versus. Bets on Fed rate hike in 2022 and 10-year bond yield spreads

US Dollar Forecasts: Key Inflation Data, Focus on Biden's Fed Appointment

Chart created in TradingView

— Written by Daniel donssky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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