US Dollar Index eyes a break above 113.00 as Fed’s Beige Book warns inflation elevation

• The DXY is expected to break above 113.00 as the risk-on impulse has faded.
• Fed policymakers have turned extremely hawkish amid accelerating price pressures.
• Fed’s Beige Book has cited risks of price growth, labor demand moderation, and sluggish demand.

The US dollar index (DXY) is hovering around the immediate hurdle of 113.00 in the Tokyo session. The asset has turned into a rangebound structure after a juggernaut rally at Tuesday’s low of 111.80. Losses recorded from the previous week’s high of 113.88 have recovered majorly after the risk-on impulse surrendered.

The release of the Federal Reserve (Fed)’s Beige Book cited the risk of elevating inflation, which faded the optimism in the S&P500 backed by quarterly results declaration. Apart from that, returns on US government bonds soared like there is no tomorrow. The 10-year benchmark US Treasury yields refreshed a 14-year high at 4.14% as bets for a bigger rate hike by the Fed have accelerated.

Fed policymakers turn extremely hawkish

St. Louis Fed Bank President James Bullard indicates that the central bank will remain hawkish for a longer period. Fed policymaker believed that the central bank is expected to lift rates by another 75 basis points (bps) when it meets on November 1-2, with an additional 50 or 75 bps increase also likely in December. He further added that the Fed needs to visit the right rate level first and then approach data dependency for further decisions.

Also, Chicago Fed President Charles Evans cited that the US central bank “Needs to make sure inflation pressures don't broaden further,” He believes that the Fed should have started tightening the monetary policy six months earlier than their first rate hike in March 2022 post-pandemic.

Fed’s Beige Book warns of price growth

The release of the Fed Beige Book cited a slowdown in discretionary demand, an elevation in inflationary pressures, and a moderation in labor demand. Four Districts noted flat economic activity and two cited declines due to flat retail spending and a slowdown in discretionary consumption led by higher interest rates and inflation, and supply disruptions.  Automobile sales have remained sluggish due to higher vehicle prices.

The price of inputs has elevated while fuel and freight costs have declined due to a decline in gasoline prices. This has impacted the EBITDA margins presented by firms. Apart from that, labor demand has moderated as firms have ditched the payroll process in anticipation of an economic slowdown.