The US dollar continues strengthening following the release of the much stronger than expected US CPI report on Wednesday. As the Federal Reserve will come under more pressure to tighten policy to dampen upside risks from inflation, USD’s upward momentum should persist, in the opinion of economists at MUFG Bank.
“The main trigger for the outsized US dollar move was, of course, the US CPI report for October that revealed headline inflation jumped by 0.9% MoM and lifted the annual rate of 6.2%. The report challenges the Fed’s view that it can take its time to only gradually tighten policy built on the assumption that inflation will fall back to target in the coming years.”
“The hawkish repricing of Fed policy expectations has reinforced the US dollar’s upward momentum from the previous week. It supports our forecast for further US dollar strength heading into year-end and takes the dollar index closer to our near-term target at the 96.000-level.”
“The main potential banana skin remains a potential dovish surprise decision from President Biden to nominate Fed Governor Lael Brainard to be Fed Chair although market participants may still believe that it will be difficult for the Fed even under her leadership to maintain loose policy conditions in light of much higher inflation.”
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